-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PE34+MHWeS5HVNWJ5NEk9ALKGAOGFachE+jWikyV9P6O7nGuQzwZUIPGNhY3F8jo gfFYMw9uEkv3H6NzVE7vPw== 0000897101-98-000350.txt : 19980401 0000897101-98-000350.hdr.sgml : 19980401 ACCESSION NUMBER: 0000897101-98-000350 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: DAKOTAH INC CENTRAL INDEX KEY: 0000859944 STANDARD INDUSTRIAL CLASSIFICATION: MISCELLANEOUS FABRICATED TEXTILE PRODUCTS [2390] IRS NUMBER: 460339860 STATE OF INCORPORATION: SD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23604 FILM NUMBER: 98580327 BUSINESS ADDRESS: STREET 1: ONE N PARK LN CITY: WEBSTER STATE: SD ZIP: 57274-0120 BUSINESS PHONE: 6053454646 MAIL ADDRESS: STREET 1: ONE NORTH PARK LANE CITY: WEBSTER STATE: SD ZIP: 57274-0120 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number DECEMBER 31, 1997 0-23604 DAKOTAH, INCORPORATED (Exact name of registrant as specified in its charter) SOUTH DAKOTA 46-0339860 (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) ONE NORTH PARK LANE, WEBSTER, SD 57274-0120 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (605) 345-4646 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Common Stock, $.01 par value Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes __X__ No___ Indicate by check mark if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-K contained herein, and no disclosure will be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K [___]. Aggregate market value of voting stock held by non-affiliates of Registrant as of March 17, 1998: Approximately $1,838,000. Number of shares of Common Stock, $.01 par value, outstanding as of March 17, 1998: 3,499,755. PART I ITEM 1. BUSINESS. INTRODUCTION Dakotah, Incorporated ("Company" or "Dakotah") designs, manufactures and markets textile home fashion furnishings which are both functional and decorative. The Company's principal products are decorative pillows, throws (polyester fleece and cotton), blankets, bedding ensembles and other home accessory products such as footstools, chair pads and table linens. The Company's objective has been to build a strong brand image associated with fashionable styling and high quality products. It markets its products (primarily under the Dakotah(R) and Polarfleece(R)* names and various licensed names) to a broad range of major retailers, including department stores, specialty retailers, mass merchandisers and mail order houses, both domestic and international. Showrooms for the Company's products, which support sales, are located across the country in New York, Atlanta, Chicago, Denver and Seattle. Founded in l971 as a craft cooperative, the Company has over 378 employees. The Company's employees are referred to as "associates" in recognition of the need for all associates to work together as a team to make the Company successful. Initially, the Company emphasized fashionable quilted and hand-crafted applique bedspreads and comforters. Applique, one of the oldest handicraft forms, is a process of making a design by sewing small pieces of fabric onto a larger base fabric. The Company utilizes creative design and manufacturing processes to develop superior fashionable products. During the 1980's, the Company shifted its focus from bedcoverings to decorative pillows as it believed the decorative pillow market presented significant opportunities for the Company to capitalize on its reputation for fashionable styling and high quality products. In October 1994, the Company announced its decision to discontinue the manufacture of quilted comforters and bedspreads and concentrate on higher margin products. During the previous ten years, demand for the Company's bedspreads and comforters had declined due to price erosion from an increase in imports. Business in decorative accessory products has substantially increased during the same decade. The decision to discontinue the quilted comforters and bedspreads enabled the Company to convert several thousand square feet of manufacturing space, plus many of its associates, from manufacturing bedspreads and comforters to other products. * Polarfleece(R) is a registered trademark of Malden Mills Industries for which Dakotah has an exclusive license to use the trademark Polarfleece(R) and other trademarks in most home furnishings product categories. PRODUCTS GENERAL. The Company's principal product groups are decorative pillows, throws (polyester fleece and cotton), blankets, bedding ensembles and other home accessory products such as footstools, chair pads and table linens. The Company's products are both functional and decorative. They allow homeowners to redecorate a room by changing the accessory items, such as decorative pillows and throws, in the room. Many of the Company's customers own more than one set of decorative accessory items for a room, so that they can change the room's appearance from time to time, for example, to match the different seasons of the year. The following table sets forth certain information regarding net sales of these product groups during the past three years:
YEARS ENDED DECEMBER 31 -------------------------------------------------------------------------- 1997 1996 1995 ---------------------- ---------------------- ---------------------- Net Sales Percent Net Sales Percent Net Sales Percent ----------- ------- ----------- ------- ----------- ------- Decorative pillows and chair pads $15,138,931 39.1% $20,147,683 48.5% $19,165,502 62.1% Throws 12,866,523 33.2% 15,748,395 37.9% 7,119,118 23.1% Blankets and bedding ensembles 7,971,950 20.6% 4,335,946 10.4% 1,912,318 6.2% Other products 2,734,080 7.1% 1,327,573 3.2% 2,687,143 8.6% ----------- ------ ----------- ------ ----------- ------ TOTAL $38,711,484 100.0% $41,559,597 100.0% $30,884,081 100.0% =========== ====== =========== ====== =========== ======
DECORATIVE PILLOWS AND CHAIR PADS. The Company offers a wide variety of decorative pillows in over 500 styles ranging from basic solid-colored pillows to high-fashion embellished tapestry and velvet pillows. Decorative pillows vary in size, are manufactured in various fabric blends and are filled with 100% polyester or a polyester/cotton blend fiberfill. The Company's decorative pillows generally sell at retail prices ranging from $9 to $70. The Company designs its pillows to meet the style standards of its customers. The Company has used the experience gained in making applique bedcovering products to make creative trims and embellishments for its pillows. The Company's chair pad product line consists of 25 different designs for chair pads and 4 different designs for rocker sets. Rocker sets consist of pads plus coordinated backs for the chairs. Many of the same fabrics selected by the Company for its decorative pillows are used to make chair pads. THROWS. The Company sells both cotton and polyester throws. The Company's line of cotton throws consists of approximately 50 different designs and is produced by non-affiliated manufacturers. The Polarfleece(R) product group consists of 25 solid colors in the classic Polarfleece(R) line, 17 solid colors in the Polarfleece(R) Wide Wale line, 25 solid colors in the Dakotah(R) Luxe(TM) line, 9 styles in the Polarfleece(R) Plus(TM) line, and 20 various prints or yarn-dyed patterns. Polarfleece(R) is a non-pill polyester fleece fabric. To satisfy certain discount customers, the Company also offers a low-pill fleece throw. BLANKETS AND BEDDING ENSEMBLES. The Company offers a variety of blankets consisting primarily of the Polarfleece(R) and Dakotah(R) Luxe(TM) lines of fabric in a number of different color schemes. The Company's bedding ensembles include a line of over 40 different duvets (comforter covers) and coverlets which slip over a comforter like a pillowcase and fasten at the end, offering consumers a quick and easy way to change bedroom decor without the expense of replacing the comforter. The target market for the Company's duvet covers is upscale retailers, including specialty retailers, department stores and mail order houses. The duvet covers generally sell at retail prices ranging from $120 to $750. OTHER PRODUCTS. The Company's other products include table linens, footstools, stuffed bears and accessories. The Company's table linen products consist of a coordinated line of placemats and napkins. This line consists of 50 different designs. The Company's line of footstools is also produced by non-affiliated manufacturers and includes 30 different designs. The stuffed bear line is comprised of two sizes of stuffed polar bears designed from the Polarfleece(R) logo used by Malden Mills. The Company sells these bears to retailers as a promotion to enhance sales of the entire line of Polarfleece(R) products. The other products category also includes wall art, miscellaneous low volume products and fabric sold by the yard. Many of these other products utilize the same fabrics as are used to make decorative pillows, chair pads and table linens or are coordinated with the designs for such products. PRODUCT DESIGN Design and color are key components of the Company's successful marketing strategy. The Company's designs include traditional, contemporary, western and novelty patterns. The Company has worked to associate the Dakotah(R) brand name with products that have unique and innovative designs. For its inaugural awards ceremony in 1988, the Home Fashion Products Association selected George C. Whyte, a founder and the Chief Executive Officer of the Company, as the winner of the Home-Tex-Design Award, which recognizes individuals who have made a major contribution to the industry in home textiles design. The Company has consistently worked to be an innovator in using fabric, color, texture and technique, in bringing innovative and exciting designs to the marketplace. In 1996, the Company's Polarfleece(R) throw was selected by Home Textiles Today, a trade publication, as the product of the year in its category. In 1997, the Company was awarded the Gold Star Gallery Award by Potentials in Marketing for its embroidered Polarfleece(R) products. The Company employs a product development staff of six persons and a product design staff of three persons who work closely with the marketing staff to develop new designs. The Company obtains its designs from numerous sources, including the Company's associates, independent free-lance designers and fabric manufacturers. Computer assisted design is used to increase design capabilities and reduce costs. The Company obtains design licenses from a number of sources, including other home textile products producers (which allows the Company and such producers to offer complementary goods) and independent designers. The Company has licensed and has sold fabric for certain of its more successful designs to manufacturers of complementary products, although net sales from this activity have not been significant. The Company's expenses for product development were approximately $962,000 in 1997, $730,000 in 1996, and $560,000 in 1995. The expenditures were for the development of new products, upgrading and management of existing product lines and the creation and purchase of new designs. LICENSED PRODUCTS The Company's products are marketed under the Dakotah(R) name and various licensed names including Polarfleece(R), Dakotah(R) Luxe(TM), Harley-Davidson(R), upscale Disney(R) Licenses, Mickey & Co.(R) , and Baby Mickey & Co.(R), Elvis Presley(R), Roy Rogers(R), and Currier & Ives(R). NEW PRODUCT INTRODUCTIONS * In December 1993, the Company introduced Harley-Davidson(R) pillows, together with a line of jacquard-woven throws and other accessory products. * At the October 1994 Home Textile Market, the Company introduced its Elvis Presley(R) line of products. * At the April 1995 Home Textile Market, the Company introduced its Polarfleece(R) and Campbell's Soup(R) line of products. * At the October 1995 Home Textile Market, the Company introduced its Polarfleece(R) collegiate licensed and outdoor furniture line of products. * At the April 1996 Home Textile Market, the Company introduced its new line of Polarfleece(R) blankets. * At the October 1996 Home Textile Market, the Company introduced Dakotah(R) Luxe(TM), a new line of luxurious microfiber throws, pillows, bedcoverings and accessories and a new line of pillows, throws and bedcoverings with the Disney(R) licenses, Mickey and Co.(R) and Baby Mickey and Co(R). * At the April 1997 Home Textile Market, the Company introduced its new line of Home-Knit(TM) throws and pillows. * At the October 1997 Home Textile Market, the Company introduced its Polarfleece(R) Wide Wale line of throws, blankets and bedding ensembles along with a new line of coordinated bedding ensembles and window treatments. SALES AND MARKETING Virtually all of the Company's products are sold directly to the retail trade primarily through 40 independent sales representative organizations and 4 full time sales professionals employed by the Company. The Company's showroom and primary sales office is located in New York City on Fifth Avenue. The sales representatives who sell to the specialty retailers have showrooms in Atlanta, Chicago, Denver, and Seattle. The Company's primary customers are department stores, specialty retailers, mass merchandisers and mail order houses in the United States. The Company markets its designs and products so that conflicts do not develop between customers in order to give the Company's customers flexibility in setting their own marketing and pricing strategies. In 1996, the Company began developing sales distribution in Canada and Europe, and in 1997, began developing sales distribution in Japan, and to a lesser degree in other countries. During 1997, the Company sold to over 2,100 customers, including buyers representing divisions of larger corporations. The Company emphasizes quick and dependable delivery of complete orders. The Company's computer systems allow customers to place orders and the Company to fill, track and bill orders. Sales representatives assist in maintaining appropriate stocking levels, maintain store displays of Company merchandise, assure proper presentation of Company products, replace damaged packaging and assist with credit, account reconciliation and collection. The Company provides point-of-sale advertising and attractive and informative packaging to obtain consumer interest. The Company generally introduces new products during February, April and October in connection with the major Home Fashion Textile markets. During these markets, buyers from all classes of the textile trade throughout the United States come to New York City to preview the products from the home textiles manufacturers. Most sales of successful new designs generally occur six months or more after the product introduction as more conservative buyers follow the lead of market innovators. Additionally, the Company participates in the home fashion textile shows at each of its showrooms and the major European home textile show, Heimtextil. During 1997, the Company and its products were featured in many major publications, including, American Baby, BHG Bedroom & Bath, Country Living, Home, Self Magazine, New York Times Home Section and Chicago Tribune Sunday Home Section. The Company was also featured in several trade publications including Home Textiles Today and Home Furnishings Network. At December 31, 1997, the Company had approximately $2.4 million of firm orders, compared to approximately $3.0 million on December 31, 1996 and approximately $2.7 million on December 31, 1995. On March 22, 1998, the Company had approximately $2.5 million of firm orders as compared to approximately $3.5 million on March 23, 1997. In general, orders require shipment within six to ten weeks. Accordingly, the Company's firm orders backlog at any time is not necessarily indicative of the level of its future sales. The Company maintains inventory levels sufficient to permit it to fill orders on a timely basis. The Company and the home furnishing industry as a whole build up finished goods inventory in the first and second calendar quarters for shipment in the third and fourth calendar quarters. This results in a significant use of working capital during the first three quarters of each year. Although approximately 18% and 11% of the Company's 1997 sales were made to two customers, the Company believes the loss of these customers would not have a material adverse effect on the Company. MANUFACTURING AND DISTRIBUTION The Company's manufacturing operations consist principally of cutting, sewing, and embroidering fabric. The Company primarily utilizes two independent contractors, one to produce all of its footstool products and one to produce its jacquard-woven cotton throws. The Company does not have the manufacturing capabilities to produce jacquard-woven textiles and footstools. Additionally, the Company uses contract manufacturers to cut and sew fabric during certain peak periods of the year. For several years, the Company has committed significant efforts to improve the productivity of its associates through the use of various total quality management concepts and automation. Significant resources have been devoted to support its quality improvement efforts. The Company attempts to maintain close contact with customer quality control personnel to assure its understanding of customer requirements. RAW MATERIALS The principal raw materials that the Company uses in manufacturing its products are solid color, print and jacquard fabrics, solid color and print polyester fleece fabrics from Malden Mills Industries, Inc. and fiberfill. The Company purchases certain fabrics with the exclusive right to the designs in the Company's markets. The Company does not import any significant portion of its raw materials. Although raw materials are purchased from only a limited number of suppliers, these raw materials are generally readily available from several manufacturers, a few of which are competitors of the Company. Purchase commitments for raw materials are generally insignificant in comparison to the total amount of a raw material to be purchased. The Company receives a significant portion of its annual supply of raw materials from Malden Mills, approximately 57% of all its raw material requirements in 1997, and in the past has manufactured a significant amount of finished goods Polarfleece(R) inventory during its first and second quarters and sold to its customers in the third and fourth quarters. As a result of this timing, the Company has had the flexibility to convert its facilities to produce other products or procure substitute fleece supplies in the event the delivery of supplies from Malden Mills would be substantially interrupted. The use of a substitute fleece would require the use of a trademark other than Polarfleece(R). The Company does not intend to continue this practice of building inventories to the extent it has in the past. In order to provide quick response to customers' orders and the lead times sometimes associated with the purchase of its raw materials, the Company makes commitments for future purchases of fabrics and cotton yarns. COMPETITION The Company participates in a highly competitive industry, competing with a number of established designers, manufacturers, importers, and distributors of textile home fashion furnishings, some of which have greater financial, distribution, and marketing resources than the Company. The principal competitive factors affecting its business include its ability to continue to create and develop quality products offering creative and fashionable designs, its marketing expertise, its relationships with customers, and its manufacturing and distribution capabilities. There is also significant competition on the basis of quality, brand names, price and service. GOVERNMENT REGULATION Federal and state laws and regulations require most of the Company's products to bear product content labels containing specified information, including their place of origin and fiber content. In addition, operations are governed by a variety of federal, state, local, and foreign laws and regulations relating to the environment, worker safety and health, advertising, importing and exporting, and other matters applicable to businesses in general. All laws and regulations are subject to change and the Company cannot predict what effect, if any, changes in laws and regulations might have on its business. TRADEMARKS AND COPYRIGHTS The Company owns various trademarks and trade names, including Dakotah(R), Dakotah Luxe(TM), Beach Buddy(R), DKTH(TM), Home-Knits(TM), Dakotah Outdoors(R), Lustrah(R), Snapwrap(TM), Snugglefleece(TM), Thermofleece(TM), Cuddlefleece(TM) and Comfortfleece(R). The Company copyrights many of its fabric designs. All trademarks, trade names and copyrights are valuable assets, and the Company seeks to protect them against infringement. There can be no assurance, however, that any effort to protect its trademarks, trade names and copyrights will be successful or that any such effort will not be prohibitively costly and time consuming. The Company has been licensed to market and manufacture products bearing trademarks owned by others, including but not limited to, Polarfleece(R), Malden Mills(R), Mickey & Co.(R), Disney(R), Baby Mickey & Co.(R), Harley-Davidson(R), Elvis Presley(R), Campbell's Soup(R), Roy Rogers(R), Wesley Mancini, Ltd. (R) and Currier & Ives(R). EMPLOYEES At March 14, 1998, the Company had 378 associates, of whom 342 were full-time and 36 were part-time. Seventy-three of these associates were on temporary lay-off as of March 14, 1998. None of the Company's associates is represented by a labor union, and the Company considers its relations with its associates to be good. Due to a shortage of labor in the northeast South Dakota area, any significant expansion of the Company's manufacturing capabilities in the future may be outside of this area. In addition, due to this labor shortage, the Company generally attempts to manage its operating activities in order to avoid any temporary reductions in its work force. At least 290 of the Company's associates own directly or through their interests in the Company's profit sharing plan, shares of the Company's Common Stock. ITEM 2. PROPERTIES. The following table summarizes certain information concerning the Company's principal facilities:
LOCATION PRINCIPAL USE APPROX. SQ. FT. OWNED/ LEASED(1) Webster, South Dakotah Headquarters and Manufacturing 72,000 Owned(2) Webster, South Dakotah Manufacturing and Distribution 23,000 Owned(2) Webster, South Dakotah Administration 4,500 Owned Webster, South Dakota Factory outlet store 8,000 Leased Redfield, South Dakota Manufacturing and distribution 42,000 Leased Sisseton, South Dakota Manufacturing and distribution 12,000 Owned Veblen, South Dakota Manufacturing and distribution 20,000 Owned Platte, South Dakota Manufacturing and distribution 20,000 Leased(3) Milbank, South Dakota Manufacturing and distribution 10,000 Owned New York, New York Sales office and showroom 5,300 Leased Atlanta, Georgia Sales office and showroom 4,500 Leased Chicago, Illinois Sales office and showroom 3,419 Leased
(1) For additional information concerning the Company's leases, see Note F to the Financial Statements. (2) These properties are being purchased by means of capital lease purchase agreements. (3) In November, 1997, the Company terminated this lease effective April 1, 1998 and consolidated its operations in Platte, SD with the operations in Redfield, SD. The Company believes that its facilities are generally well maintained and in good operating condition. ITEM 3. LEGAL PROCEEDINGS. From time to time the Company is a party to various legal proceedings arising in the ordinary course of business. The Company is not currently a party to any material litigation and is not aware of any litigation threatened against it that could have a material adverse effect on its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. No matters were submitted to a vote of security holders during the fourth quarter of 1997. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's Common Stock is traded on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") National Market System under the symbol DKTH. The following table sets forth for each period indicated the high and low closing sale prices for the Company's Common Stock, as reported by NASDAQ: HIGH LOW ---- --- 1996 First Quarter $4.25 $3.50 Second Quarter 4.50 3.625 Third Quarter 5.00 4.25 Fourth Quarter 5.00 4.00 1997 First Quarter $4.625 $3.125 Second Quarter 3.50 2.125 Third Quarter 3.375 2.375 Fourth Quarter 3.25 1.438 These quotations represent prices between dealers, and do not include retail markups, markdowns or commissions. The number of record holders of the Company's Common Stock on March 18, 1998 was 276. The Company estimates that an additional 1,100 shareholders own stock held for their account at brokerage firms and other financial institutions. The Company has never paid a cash dividend and expects to retain future earnings for operations and expansion of its business. The future payment of dividends, if any, rests within the discretion of the Company's Board of Directors and will depend, among other things, upon the Company's earnings, capital requirements and financial condition. There were no unregistered sales of the Company's Common Stock during the fourth quarter of 1997. On February 23, 1998, the National Association of Securities Dealers placed into effect new rules that require, among other things, issuers of securities to maintain a market value of public float of at least $5 million to continue listing on the NASDAQ National Market System. The Company is not currently meeting these new requirements and as a result, it is the Company's intention to apply for listing on the NASDAQ SmallCap Market. ITEM 6. SELECTED FINANCIAL DATA. The following table sets forth selected financial information for the periods indicated. The information should be read in conjunction with the Company's financial statements included in this report. STATEMENTS OF OPERATIONS DATA
Years ended December 31, ------------------------------------------------------------ 1997 1996 1995 1994 1993 -------- -------- -------- -------- -------- (in thousands, except per share data) Net sales $ 38,712 $ 41,560 $ 30,884 $ 30,402 $ 23,428 Cost of goods sold 30,169 30,599 22,485 22,377 16,302 -------- -------- -------- -------- -------- Gross profit 8,543 10,961 8,399 8,025 7,126 Selling, general and administrative expense 10,266 9,229 7,542 6,346 5,259 -------- -------- -------- -------- -------- Operating profit (loss) (1,723) 1,732 857 1,679 1,867 Other expense (1,194) (500) (141) (98) (149) -------- -------- -------- -------- -------- Earnings (loss) before income taxes and cumulative effect of a change in accounting principle (2,917) 1,232 716 1,581 1,718 Income tax expense (benefit) (1,030) 404 256 550 465 -------- -------- -------- -------- -------- Earnings (loss) before cumulative effect of a change in accounting principle (1,887) 828 460 1,031 1,253 Cumulative effect of a change in accounting principle, net of taxes (81) -- -- -- 179 -------- -------- -------- -------- -------- Net earnings (loss) ($ 1,968) $ 828 $ 460 $ 1,031 $ 1,432 ======== ======== ======== ======== ======== PER SHARE AMOUNTS Earnings (loss) before cumulative effect of a change in accounting principle - Basic ($ 0.54) $ 0.24 $ 0.13 $ 0.32 $ 0.47 ======== ======== ======== ======== ======== Dilutive ($ 0.54) $ 0.23 $ 0.13 $ 0.32 $ 0.47 ======== ======== ======== ======== ======== Cumulative effect of a change in accounting principle - basic and dilutive (0.02) -- -- -- 0.07 -------- -------- -------- -------- -------- Net earnings (loss) Basic ($ 0.56) $ 0.24 $ 0.13 $ 0.32 $ 0.54 ======== ======== ======== ======== ======== Dilutive ($ 0.56) $ 0.23 $ 0.13 $ 0.32 $ 0.54 ======== ======== ======== ======== ======== Weighted average common and common equivalent shares outstanding -------- -------- -------- -------- -------- Basic 3,500 3,500 3,500 3,256 2,661 Dilutive 3,500 3,550 3,509 3,259 2,661 -------- -------- -------- -------- -------- BALANCE SHEET DATA Working capital $ 5,042 $ 6,760 $ 7,587 $ 8,400 $ 2,969 Total assets 27,468 22,930 18,136 14,072 11,485 Short-term debt 12,798 6,743 3,667 647 549 Long-term obligations, less current maturities 1,813 913 1,051 1,368 729 Redeemable common stock -- -- -- -- 8,131 Stockholders' equity (deficit) 8,756 10,448 9,520 9,060 (4,229)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. GENERAL: Dakotah, Incorporated ("Company" or "Dakotah") designs, manufactures and markets textile home fashion furnishings which are both functional and decorative. The Company's principal products are decorative pillows, throws (polyester fleece and cotton), blankets, bedding ensembles and other home accessory products such as footstools, chair pads and table linens. The Company's objective has been to build a strong brand image associated with fashionable styling and high quality products. It markets its products (primarily under the Dakotah(R) and Polarfleece(R) names and various licensed names) to a broad range of major retailers, including department stores, specialty retailers, mass merchandisers and mail order houses, both domestic and international. Showrooms for the Company's products, which support sales, are located across the country in New York, Atlanta, Chicago, Denver and Seattle. In December of 1993, the Company purchased manufacturing facilities in Milbank, South Dakota. In September, 1995, the Company leased a manufacturing plant in Platte, South Dakota to manufacture Polarfleece(R) throws. In November, 1997, this facility was closed, as described below. In the Spring of 1996, the Company leased a manufacturing plant in Redfield, South Dakota to manufacture Polarfleece(R) throws, blankets and other bedcovering items. In the first quarter of 1997, the Company completed a 32,000 square foot expansion of its main manufacturing facility in Webster, South Dakota and terminated its lease of another facility in Webster, South Dakota which was used primarily as a warehouse and distribution center. The current facilities should allow the Company adequate flexibility and capacity to satisfy projected sales volume in 1998. RESTATEMENT OF SECOND AND THIRD QUARTER 1996 FORM 10-Q'S. During the course of the Company's 1996 annual close procedures, the Company noted that it had inadvertently overlooked certain items during the preparation of its 1996 second and third quarter Form 10-Q's. Upon identification of those matters, the Company amended the respective Form 10-Q's to adjust for those items. The discussion and analysis herein reflects these amendments. YEAR 2000 INITIATIVE. The Company has studied its computer hardware and software and is contacting external vendors and other suppliers to determine its exposure to the change of the century date problem. The year 2000 date problem consists of a date format shortcoming where the year is represented by only two digits causing programs that perform arithmetic operations, comparisons, or sorting of date fields to yield incorrect results. Based on the study performed, and analysis of the software the Company is currently implementing, it does not believe that the year 2000 and beyond will present any system problems as the software being implemented is expected to be fully compliant with year 2000. The Company expects to spend approximately $200,000 in capital expenditures in 1998 to complete its planned computer conversion which is expected to happen in second quarter of 1998. RESULTS OF OPERATIONS: The following table sets forth the percentage relationship to net sales of certain items in the Company's statements of operations for the years ended December 31, 1997, 1996, and 1995:
Years Ended December 31, Statements of operations ----------------------------------- data as a percent of net sales: 1997 1996 1995 ------------------------------- ---- ---- ---- Net sales 100.0% 100.0% 100.0% Gross profit 22.1 26.4 27.2 Selling expenses 13.2 13.2 14.1 General and administrative expenses 13.3 9.0 10.3 Operating profit (loss) (4.4) 4.2 2.8 Interest expense 3.1 1.5 .8 Earnings (loss) before income taxes and cumulative effect of a change in accounting principle (7.5) 3.0 2.3 Net earnings (loss) (5.1) 2.0 1.5
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 NET SALES increased from $30.9 million in 1995 to $41.6 million in 1996, then declined to $38.7 million in 1997. The 1997 sales decline was due to a number of factors. Sales in the fourth quarter of 1997 declined approximately 20% from the same period of 1996 as a result of the warmer than normal weather, which caused a decline in demand for throws and blankets, the demands of certain customers of the Company to return products due to their excess inventories and demands of certain customers to provide sales incentives and discounts on sales of the Company's Polarfleece(R) and Dakotah(R) Luxe(TM) products. Also, during the fourth quarter, as a result of declining sales, coupled with excess inventories, the Company became more aggressive on lowering prices to deplete inventory levels. The decline in the fourth quarter of 1997 was offset by an increase in sales of the Company's Polarfleece(R) line of products and bedding ensembles during the first three quarters of 1997 as compared to the first three quarters of 1996. Additionally, during 1997, as compared to 1996, the Company experienced an overall decline in sales of decorative pillows and throws, partially offset by an increase in sales of blankets and bedding ensembles. Finally, the results reflect the negative effects of (1) the Company's consolidation of its primary warehouse and shipping and receiving facility to the main Webster, SD manufacturing facility, (2) the move of the Webster, SD pillow finishing manufacturing facility to the main Webster, SD manufacturing facility, (3) the effect of the severe winter weather in early 1997 and (4) inadequate fabric delivery from certain suppliers which adversely effected the Company's ability to meet delivery expectations of certain customers. The 1996 net sales increase was due primarily to the sales growth of the Company's Polarfleece(R) line of products, pillow products, bedcoverings and accessories, and cotton throws. Only the Company's table linen products and footstool products did not experience growth. The trend of declining sales and the effects of reducing prices on certain products in an effort to decrease inventories has continued into the first quarter of 1998. Management believes that the decline in sales is due in part to the downturn in the business of the Company's customers and the excess inventories that they carried into 1998. During the first quarter of 1998 the Company hired a new Vice President of Sales and Marketing from a competitor of the Company in an effort to reverse these trends and help develop other markets for the Company's products. The Company expects the trend of declining sales to reverse in the third and fourth quarters of 1998 and expects to see a growth in the specialty store market. GROSS PROFIT MARGINS were 22.1% in 1997, 26.4% in 1996 and 27.2% in 1995. In 1997, the decline in gross margins was the result of sales discounts and incentives, mentioned above, an increase in charges to cost of goods sold to reduce the value of inventory to market, due to the excessive inventory levels at the end of 1997, an increase in manufacturing overhead resulting from capacity and infrastructure built with the expectation of higher sales for 1997 and a decline in manufacturing efficiencies in the third and fourth quarter of 1997. Margins were also negatively impacted as compared to 1996 by the indirect costs associated with the Company's move of its Webster, SD warehouse and pillow finishing manufacturing and reconfiguration. Margins were positively effected in 1997, as compared to 1996 by an improved product mix during the first three quarters of 1997 which was comprised of increased volume of the Company's Polarfleece(R) line of products, improved margins in bedding ensembles, and a decreased volume of lower margin products, such as chairpads and table linens, partially offset by a decline in the volume of decorative pillow sales. Margins were also positively affected in 1997 by the negative effect in April, 1996 of the start-up of the Redfield, SD manufacturing facility. The trend of declining margins is expected to continue into the first half of 1998 as the Company continues to reduce inventories. That declining trend is expected to be offset partially by the efforts of the Company in (1) reducing indirect labor costs, (2) the consolidation of the Company's Polarfleece(R) manufacturing in Redfield, SD and the closing of its facility in Platte, SD, (3) improving manufacturing efficiencies, (4) improving inventory management and (5) reducing other items of manufacturing overhead. In 1996, the gross margin was negatively affected by the start-up of the Redfield manufacturing facility and changing product mix. The Polarfleece(R) line of products have a higher percentage of raw materials, relative to sales which reduces gross margins. Although the cost of fiberfill decreased in 1996, substantially all of this cost savings was passed on to the Company's customers. SELLING EXPENSES were $5.1 million in 1997, $5.5 million in 1996 and $4.3 million in 1995. Selling expenses during 1997 decreased primarily due to the net effect of (1) a decrease in sales commissions of approximately $394,000 resulting from a decrease in sales, changes in the compensation structure and product mix, (2) increased cost of showroom rent, supplies and decorating of approximately $191,000, (3) increased sales support and shipping personnel to support the growth of sales expected for 1997 of approximately $173,000, (4) a decline in the costs of advertising in 1997 of approximately $210,000 and (5) various other factors, including increased participation in trade shows and international marketing. As a percentage of net sales, selling expenses were 13.2% in 1997 and in 1996 and 14.1% in 1995. Selling expenses decreased as a percentage of sales in 1996 due to increased sales. GENERAL AND ADMINISTRATIVE EXPENSES were $5.2 million in 1997, $3.7 million in 1996, and $3.2 million in 1995. General and administrative expenses increased approximately $1,437,000 in 1997 due to (1) an increase in administrative, clerical, and management staff of approximately $425,000 to support the expected growth of the Company, the need to provide staff to accomplish the planned computer conversion and re-engineering of the Company's processes and systems, and a growth in product development and design personnel, (2) an increase of approximately $100,000 in recruiting costs for senior management and staff positions, (3) increased professional fees of approximately $117,000 primarily related to expanding product distribution to international markets and increased accounting and reporting costs, (4) increased computer and communication costs of approximately $137,000, (5) the recognition of approximately $177,000 of additional compensation due to the termination of the consulting agreement with the Company's former Chief Executive Officer in 1997, (6) an increase of approximately $130,000 in product design and development staff to support the growth of the Company's product line, (7) the write-down of approximately $144,000 of previously capitalized costs relating to the planned computer conversion, in which management determined that the carrying amount of the asset was not fully recoverable and (8) a general increase in costs relating to the Company's planned computer conversion and planned sales in the fourth quarter of 1997. As a percentage of net sales, general and administrative expenses increased from 9.0% in 1996 to 13.3% in 1997 as a result of the above mentioned increases. The Company has implemented cost reduction programs which are expected to reduce general and administrative expenses by more than $800,000 in 1998. Additional reductions can be expected into 1999. A significant amount of this reduction will come from (1) decreases in staffing at all levels, (2) a reduction in consulting fees relating to the implementation of the computer system, (3) a decline in professional fees, insurance and communication costs, and (4) various other items. The Company anticipates making further reductions in 1999. INTEREST EXPENSE increased from $613,000 in 1996 to $1,201,000 in 1997. This increase was primarily the result of higher average borrowings to finance capital expenditures and the buildup of inventory to support the Company's expected sales in the third and fourth quarters of 1997. The EFFECTIVE INCOME TAX RATE was 35.3% in 1997, 32.8% in 1996 and 35.8% in 1995. The higher effective rate in 1997 as compared to 1996 was due to a decrease in the amount of charitable contributions of obsolete fabric and second quality product to certain charities. The Company has recognized deferred tax assets of approximately $748,000. Realization of these assets is dependent on the Company's return to profitability, which as indicated below is expected to occur in 1999. Realization of these tax benefits is dependent on margins returning to pre 1997 levels and managements' efforts at cost reductions. The Company believes that it is more likely than not that it will fully recover these deferred tax assets in the future. COST REDUCTION INITIATIVES. During the fourth quarter of 1997, the Company announced the consolidation of its Polarfleece(R) manufacturing in Redfield, SD, and the closing of its facility in Platte, SD, which employed approximately 39 full time personnel and 13 temporary personnel. During the first quarter of 1998, the Company initiated a number of cost reduction initiatives, some of which were discussed above. The Company has reduced its labor force from over 540 associates on September 30, 1997 to 378 associates, some of which are currently on a temporary layoff status. The Company expects to decrease the number of associates laid off as it moves into the second quarter and during which time sales are expected to increase. As a result of the efforts to reduce inventory, which is anticipated to cause a reduction in margins, the Company does not expect to generate income from operations in 1998, unless a substantial increase in sales occurs. The Company expects to return to profitability in 1999 as a result of the cost reductions put in place for 1998 and its ability to return margins to historical levels. CUMULATIVE EFFECT OF A CHANGE IN ACCOUNTING PRINCIPLE. Pursuant to Emerging Issues Task Force (EITF) Issue No. 97-13, the Company changed its accounting policy in the fourth quarter of 1997, relating to costs of a planned software system conversion. Previously, substantially all direct costs relating to the project were capitalized, including the portion relating to business process reengineering . Under this pronouncement, all future costs for business reengineering must be expensed as incurred and previously capitalized costs as of September 30, 1997 of approximately $125,000, approximately $81,000, net of income tax benefits, were written off as a cumulative adjustment in the fourth quarter of 1997. LIQUIDITY AND CAPITAL RESOURCES: The Company had cash and cash equivalents of $45,000 as of December 31, 1997, and $3,000 as of December 31, 1996. Working capital was $5.0 million as of December 31, 1997, and $6.8 million as of December 31, 1996. The 1997 increase in cash and cash equivalents and decrease in working capital was primarily due to the losses from operations, offset by the long-term financing provided by new term loans to fund the purchase of capital expenditures in 1996 and 1997 which decreased the amounts outstanding on the Company's line of credit. In the first quarter of 1997, the Company refinanced over $900,000 of the 1996 capital expenditures with low-interest loans from the State of South Dakota and the Northeast South Dakota Energy Conservation Corporation. In the third quarter, as explained below, the Company refinanced approximately $2,000,000 of the 1996 and 1997 capital expenditures with a term loan provided by the Company's primary lender. The net cash used in operating activities and investing activities during 1997 was primarily financed from net borrowings under the Company's line of credit and proceeds from the issuance of long-term debt mentioned above. The net cash used in operating activities is primarily due to net losses incurred in 1997 and the $6.0 million increase in inventory, offset by a $3.0 million decrease in accounts receivable. The net cash used in investing activities is due to capital expenditures and the capitalized costs of the computer conversion. Accounts receivable were $4,492,000 as of December 31, 1997, and $7,539,000 as of December 31, 1996. The decrease in 1997 was due to decreased sales during the fourth quarter of 1997 as compared to the same period of 1996. Inventories were $15,423,000 as of December 31, 1997, and $9,556,000 as of December 31, 1996. The increase in 1997 was due to increased raw material and finished goods inventory of Polarfleece(R) and less than expected sales in the fourth quarter of 1997. The Company has introduced a plan under which it expects to reduce its average level of inventory during 1998. The allowance for doubtful accounts decreased from $382,000 at December 31, 1996 to $326,000 at December 31, 1997. The decline is the result of the resolution of accounts which had associated reserves established against them in 1996 and the decline in sales. The Company estimates the allowance for doubtful accounts based on the best information available to management. Management believes that the allowance is adequate to cover any losses which may occur. Accounts payable were approximately $1,782,000 as of December 31, 1997 and $2,135,000 as of December 31, 1996. The decrease as of December 31, 1997 as compared to 1996 is primarily related to the reduction of raw material purchases late in the fourth quarter of 1997 as compared to 1996, as the Company reacted to the decline in sales late in the year. The Company has used and expects to continue using its revolving line of credit to meet its short-term working capital requirements. During the second quarter of 1997, the Company refinanced its credit facility. The Company also amended its credit facility in the third quarter of 1997 and again in the first quarter of 1998. The amended credit facility, which expires in June, 1999 is intended to accommodate the Company's restructuring efforts in 1998, including its sales of inventory at prices lower than historical levels. The total amount available under the revolving note, which is due on demand, is limited to the lesser of $15,000,000 or a defined borrowing base of eligible trade accounts and income tax receivables, inventory balances, plus outstanding amounts under the term note, plus $1,000,000. Advances under the revolving note, based on eligible receivables, inventory balances, and the additional $1,000,000, provide for monthly interest payments at 1%, 3% and 4%, respectively, above the financial institution's prime rate (effective rates of 9.5%, 11.5% and 12.5%, respectively at December 31, 1997). Advances under the term note, which is due on demand and which requires monthly principal payments of $33,333, provide for monthly interest payments at 1% above the financial institution's prime rate (effective rate of 9.5% at December 31, 1997.) The outstanding balances on the revolving note and the term note were $10,997,734 and $1,800,002 at December 31, 1997. The outstanding balances on the previous revolving note and term note were $6,034,750 and $708,333 at December 31, 1996 For the year ended December 31, 1997, the Company's capital expenditures were $2,019,000. These expenditures include $503,000 to upgrade computer hardware and refinance operating leases existing prior to the upgrade, approximately $306,000 was used to purchase additional manufacturing and transportation equipment, approximately $376,000 was used for the purchase of additional computer network workstation hardware and software and approximately $610,000 was capitalized for internal and external costs incurred in connection with the planned computer system conversion. The remaining $224,000 was primarily used for plant and office space remodeling and expansion and the purchase of additional equipment. For the year ended December 31, 1996, the Company's capital expenditures were $2,381,000. These expenditures include $1,891,000 to expand manufacturing capacity, upgrade existing buildings and additional production equipment and $399,000 to upgrade the Company's computer system. The Company expects to spend an aggregate of approximately $200,000 in 1998 to complete the planned computer conversion which is expected to be completed during the second quarter of 1998. During the first quarter of 1998, the Company completed negotiations for the expansion of its facilities in Sisseton, SD, which were to be financed through the issuance of a long-term lease purchase agreement and the exchange of its current facility in Sisseton, SD. At this time, the Company is not committed in any way to go forward with the transaction and has delayed moving forward, pending the nature of the Company's financial situation during the second quarter of 1998. In the event the transaction is completed, it is not expected to have a material effect on the Company's financial statements. The Company does not have any additional plans for material capital expenditures in 1998 as a result of its cost reduction initiatives, as mentioned above. Upon termination of the officers' stock appreciation program, the Company became indebted to the Company's President and a former Executive Vice President in the aggregate amount of $1,318,000. As of December 31, 1997 and 1996, the total outstanding indebtedness was $263,800 and $461,000, respectively. This indebtedness bears interest at 6% per annum and is due on demand. The Company believes that cash flows generated from operations and funds available as a result of its borrowing capacity will be adequate to meet its working capital, projected capital expenditures and other financing needs for 1998 and the future. FORWARD LOOKING STATEMENTS With the exception of historical information, the matters discussed or incorporated by reference in this Annual Report on Form 10-K are forward-looking statements that involve risks and uncertainties including, but not limited to, economic conditions, product demand and industry capacity, competitive products and pricing, manufacturing efficiencies, new product development, availability of raw materials, new plant startups, financing needs or plans, intellectual property rights, and other risks indicated in filings with the Securities and Exchange Commission. ITEM 7A. QUANTITATIVE AND QUALITITATIVE DISCLOSURES ABOUT MARKET RISK. Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The following financial statements and schedules relating to the Company are included herein: Financial Statements: Report of Independent Certified Public Accountants.................................................... 31 Balance Sheets at December 31, 1997 and 1996.......................................................... 32 Statements of Operations for years ended December 31, 1997, 1996 and 1995............................. 33 Statements of Changes in Stockholders' Equity for years ended December 31, 1997, 1996 and 1995........ 34 Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995............................. 35 Notes to Financial Statements......................................................................... 36 Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts for years ended December 31, 1997, 1996 and 1995 ..... 51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. DIRECTORS AND EXECUTIVE OFFICERS The directors and executive officers of Dakotah are as follows:
Name Director Since Age Positions With The Company - ---- -------------- --- -------------------------- George C. Whyte(1) 1980 48 President, Chief Executive Officer and Chairman of the Board of Directors Gary L. Conradi (1,2,3) 1984 58 Vice Chairman of the Board of Directors James D. Becker(2) 1990 37 Mechanic, Director Dorothy A. Benson(2) 1986 53 Product Development Specialist, Director Michael G. Grosek(1,3) 1991 42 Director Troy Jones, Jr. (1) 1994 37 Director Linda J. Laskowski(2) 1994 48 Director Leo T. Reynolds(3) 1995 52 Director Lee A. Schoenbeck(1,2) 1993 39 Secretary, Director Georgie Olson Harper -- 43 Vice President, Corporate Sales William R. Retterath -- 36 Chief Operating Officer, Chief Financial Officer, Treasurer Michael G. Morton -- 52 Vice President, Sales and Marketing
- ----------------------------------------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee GEORGE C. WHYTE is a founder of the Company and has been its Chairman of the Board of Directors since June 1988. Mr. Whyte also served as President from the Company's inception to June 1988 and from April 1991 to the present, and as Chief Executive Officer from June 1988 to January 1995 and from December 1997 to the present. He was elected to the Board of Directors in July 1980. GARY L. CONRADI was elected to the Board of Directors in 1984 and serves as the Vice Chairman of the Board of Directors. Since 1980, Mr. Conradi has served as the Vice President of Corporate Services for Raven Industries, Inc., a manufacturer of specialized plastics, electronics and apparel. JAMES D. BECKER was elected to the Board of Directors in July 1990. He has been a sewing machine mechanic for the Company since April 1988. DOROTHY A. BENSON was elected to the Board of Directors in July 1986. From July 1993 to the present, she has been a Product Development Specialist for the Company. Ms. Benson, a Company associate since July 1983, has worked in various other Company positions including as a Pattern Maker and Data Design Specialist. MICHAEL G. GROSEK was elected to the Board of Directors in July 1991. Mr. Grosek has been the Mayor of the City of Webster, South Dakota since 1985. For more than five years, he has also owned and operated Mike's Jack & Jill, a supermarket in Webster, South Dakota. TROY JONES, JR. was elected to the Board of Directors in August 1994, and served as the Company's Chief Executive Officer from January 1995 to December 1997 and Treasurer from June 1996 to June, 1997. Mr. Jones has been President of Orion Financial Corp. of South Dakota since July 1993. For more than six years prior to that, he was Director of Finance in the South Dakota Governor's Office of Economic Development. LINDA J. LASKOWSKI was elected to the Board of Directors in August 1994. Ms. Laskowski has been with U.S. West Communications since 1987, as Vice President and General Manager of Information Provider Market until October 1991, as Chief Executive Officer of CLM Associates (a joint venture between U.S. West Communications and France Telecom) from October 1991 to January 1994, as Vice President - South Dakota from March 1993 to December 1996, and as Vice President of Telephony of Continental Cablevision (which was acquired by U.S. West in 1996) since January 1997. LEE A. SCHOENBECK returned to the Board of Directors in December 1993, having previously served on the Board of Directors from July 1985 through July 1991. Mr. Schoenbeck has served as Secretary of the Company since October 1995. Mr. Schoenbeck has been an attorney in Webster, South Dakota since 1984, and currently provides services as outside General Counsel to the Company. LEO T. REYNOLDS was elected to the Board of Directors in December 1995. Mr. Reynolds is the President of Electronic Systems, Inc., a electronics manufacturing company. GEORGIE OLSON HARPER was named the Company's Vice President, Corporate Sales in March of 1998. From February 1996 to March 1998, she served as the Company's Vice President of National Sales and was its National Sales Manager from April 1991 through January 1996. Ms. Olson Harper, a Company associate since 1975, has worked in various other Company positions including Contract Sales Manager and Customer Service Manager. WILLIAM R. RETTERATH has been the Company's Chief Financial Officer since April 1997 and was named its Treasurer in June 1997 and its Chief Operating Officer in December 1997. Prior to joining the Company, he served as the Chief Financial Officer and Treasurer of Juran & Moody, Inc. in St. Paul, Minnesota. He also spent over 4 years with Deloitte and Touche in Minneapolis, Minnesota. MICHAEL G. MORTON was named Vice President of Sales and Marketing in March of 1998. Prior to joining the Company, Mr. Morton served as the Vice President of Sales and Marketing for The Manual Woodworkers and Weavers, Inc. and previously served as the President of Crown Home and Gifts, Crown Crafts, Inc. Pursuant to the Company's Articles of Incorporation, the Board of Directors is divided into three classes serving staggered three-year terms expiring at each successive annual meeting of stockholders. The officers of the Company are appointed by the Board of Directors and hold office until their successors are chosen and qualified. CERTAIN FILINGS Section 16(a) of the 1934 Act requires the Company's directors, executive officers, and persons who own more than ten percent of the common Stock of the Company to file with the Securities and Exchange Commission ("Commission") initial reports of beneficial ownership and reports of changes in beneficial ownership of common shares of the Company. directors, officers, and greater than ten percent shareholders are required by the regulations of the Commission to furnish the Company with copies of all Section 16(a) reports they file. To the Company's knowledge, based solely on review of the copies of such reports furnished to the Company and written representations that no other reports were required, during the fiscal year ended December 31, 1997, all required reports were filed timely. ITEM 11. EXECUTIVE COMPENSATION. SUMMARY COMPENSATION TABLE The following table sets forth certain information for the Company's fiscal years ended December 31, 1997, 1996, and 1995 regarding compensation earned by or awarded to the Company's Chief Executive Officer, Chief Operating Officer, and former Chief Executive Officer, the only executive officers whose total annual salary and bonus exceeded $100,000 (the "Named Executive Officers").
ANNUAL COMPENSATION($) ---------------------------------------------- LONG-TERM COMPENSATION FISCAL OTHER ANNUAL OPTION ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS(1) COMPENSATION AWARDS(#) COMPENSATION($) --------------------------- ---- ------ -------- ------------ --------- --------------- George C. Whyte President, Chief Executive 1997 143,832 -0- -0- -0- -0- Officer and Chairman of the 1996 145,000 29,000 -0- 100,000 -0- Board 1995 141,000 58,000 -0- 25,000 1,545(2) William R. Retterath (5) Chief Financial Officer, Chief Operating Officer and Treasurer 1997 90,945 -0- -0- 100,000 50,000(3) Troy Jones, Jr.(4) 1997 -0- -0- 152,462 -0- -0- Former Chief Executive 1996 -0- -0- 150,000 242,745 -0- Officer 1995 -0- -0- 200,000 100,000 -0-
- ----------------------- (1) Cash bonuses have been included as compensation for the year earned, calculated in accordance with the terms of the individual's incentive compensation plan, even though actually paid in the subsequent year. (2) Consists of the value of the cash contributions to the Company's Profit Sharing Plan allocated to the executive officer . (3) Consists of compensation in lieu of payment for relocation costs. At December 31, 1997, $25,000 of this amount remained due and payable to Mr. Retterath. (4) All compensation for Mr. Jones' service to the Company was paid to Orion Financial Corporation of South Dakota ("Orion"). The Company had engaged Orion to provide such services. Mr. Jones is the President and controlling shareholder of Orion. (5) Mr. Retterath became an executive officer of the Company in April, 1997. OPTIONS GRANTED DURING FISCAL 1997 The following table provides information relating to options granted to the Named Executive Officers during the Company's fiscal year ended December 31, 1997:
INDIVIDUAL GRANTS -------------------------------------------------------------------------------------------------------- POTENTIAL REALIZABLE VALUE OPTIONS EXERCISE AT ASSUMED ANNUAL RATES OF STOCK GRANTED PERCENT OF TOTAL OPTIONS PRICE EXPIRATION PRICE APPRECIATION FOR OPTION TERM NAME (#)(1) GRANTED IN FISCAL YEAR(#/sh) ($)(2) DATE 5%($)(3) 10%($)(3) -------------------------------------------------------------------------------------------------------- William R. Retterath (4) 100,000 59.1% $2.6875 4/07/04 109,021 254,066
(1) The number indicated is the number of shares of Common Stock that can be acquired upon exercise of the option. The Company has not granted any stock appreciation rights. (2) Exercise prices are equal to the fair market value at the date of grant. (3) The assumed 5% and 10% annual rates of appreciation are hypothetical rates selected by the Securities and Exchange Commission and are not intended to, and do not, forecast or assume actual future stock prices. (4) One-fifth of these options vested at the grant date. The remaining options vest annually over the next four years beginning January 1, 1998. AGGREGATED OPTION EXERCISES DURING FISCAL 1997 AND FISCAL YEAR-END OPTION VALUES The following table provides information related to the number and value of options held by the Named Executive Officers as of December 31, 1997. The Company does not have any outstanding stock appreciation rights.
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED SHARES VALUE OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT ACQUIRED ON REALIZED YEAR-END(#) FISCAL YEAR-END($)(1) NAME EXERCISE(#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE -------------------------------------------------------------------------------------- George C. Whyte -0- -0- 209,300 / 100,000 - 0 - / - 0 - William R. Retterath -0- -0- 20,000 / 80,000 - 0 - / - 0 -
(1) Options are "in-the-money" if the fair market value of the underlying shares at fiscal year end is greater than the exercise price. 1995 STOCK OPTION PLAN The 1995 Stock Option Plan ("1995 Plan") was approved by the Board of Directors, effective December 19, 1995 and by the shareholders on June 12, 1996. All employees and consultants of the Company, including officers and directors, are eligible to receive options under the 1995 Plan. The 1995 Plan authorizes the granting of options to purchase up to 800,000 shares of Common Stock. The 1995 Plan provides both for incentive stock options specifically tailored to the provisions of the Internal Revenue Code of 1986 and for options not qualifying as incentive options. The 1995 Plan is administered by a committee of the Board of Directors. The 1995 Plan generally does not specify the terms and conditions of options to be granted under the Plan, and options issued shall be exercisable at such times and subject to such restrictions and conditions as the committee shall in each instance approve. The 1995 Plan further provides that upon the occurrence of certain "acceleration events" the options will become fully vested. An acceleration event occurs (i) when a person, or group of persons acting together, becomes the beneficial owner of 30 percent or more of the Company's outstanding shares; (ii) when a change in majority of the Board occurs without the approval of at least 60% of the prior Board; or (iii) the approval by stockholders of a sale of all or substantially all the assets or of a liquidation or dissolution of the Company. EMPLOYMENT AGREEMENTS The Company has entered into an employment agreement with George C. Whyte. The Agreement provides for an initial term of employment ending on December 31, 2001, annual compensation, annual percentage increases in base salary, and participation in bonus and benefit plans of the Company in effect from time to time. In connection with the Agreement, Mr. Whyte was granted an option to purchase 100,000 shares of the Company's Common Stock. The Agreement also provides that the Company shall make available to Mr. Whyte a loan to fund a portion of the exercise price of such options. The Agreement terminates automatically upon the death of the employee and the Company may terminate the agreement only for cause (as defined in the agreement). Subject to certain conditions and exceptions, the Agreement provides that Mr. Whyte may not compete with the Company in the United States nor solicit any of its customers or employees for a period of one year following termination of his employment. EMPLOYEE PROFIT SHARING PLAN Effective January 1, 1988, the Company adopted the Dakotah, Incorporated Employee Profit Sharing Plan (the "Plan"). In general, all employees who are not covered by a collective bargaining agreement are eligible to participate in the Plan after completing one year of service as defined in the Plan. Plan benefits are 100% vested at the completion of five years of service. Prior to the completion of five years of service there is no vesting. The Plan also provides for 100% vesting at the normal retirement date or upon death or disability of the participant. Contributions to the Plan are determined each year by the Board of Directors at its discretion, but are limited to maximum permissible amounts as defined in the Plan. Contributions to the Plan may be made in the form of shares of the Company's Common Stock, valued at their fair market value, or cash. The Company may direct that contributions made in cash will be used to purchase Company Stock in the open market. Contributions to the Plan are allocated among eligible participants in the proportion of each participant's salary to the total salaries of all participants for the year in which the contribution was made, and are held in trust until each participant's retirement, disability, death or other termination of employment. All future distributions shall be made in Common Stock, unless the recipient elects to receive cash. The Company administers the Plan. First American Trust is the Trustee of the Plan. For 1996 and 1995, cash contributions of $59,000 and $50,000 were made which the Company directed be used to purchase the Company's issued and outstanding Common Stock. No contribution was made to the plan for the year ended December 31, 1997. DIRECTOR COMPENSATION Effective January 1, 1995, a new director's compensation plan was approved by the Executive Committee of the Board of Directors which provides that each director who is not employed by the Company will receive $550 per Board or committee meeting attended, will receive $300 for any such meeting held by telephone conference, and will receive an annual retainer of either $1,500 (for executive committee members) or $1,000 (for other outside directors). Each employee director who is not an officer will receive $150 per Board or committee meeting. Travel expenses for directors continue to be reimbursed. Certain Board members have voluntarily elected to temporarily forgo any funds owing under this plan and any future funds earned. 1996 STOCK OPTION PLAN FOR DIRECTORS The 1996 Stock Option Plan for Directors ("Director Plan") was approved by Board of Directors effective May 9, 1996 and by the shareholders on June 12, 1996. The Director Plan provided that effective upon approval of the Director Plan to the shareholders that each director who is not an officer of the Company would receive an option to purchase 4,000 shares. For purposes of the Director Plan, the director who is also the secretary of the Company is not considered an "officer". A person not currently a member of the Board of Directors will receive an option to purchase 4,000 shares upon his or her initial election as a director. On the date of each subsequent annual meeting of shareholders, each director will receive an additional option to purchase 2,000 shares; provided that such director has received no other option under the Director Plan during the immediately preceding six month period. The exercise price of all options under the Director Plan is equal to the fair market value on the grant date, and each option will be fully vested on the grant date. If an optionee ceases to serve as a director of the Company for any reason other than death, disability or for cause, the option may be exercised subject to the expiration date of the option for three months after such termination. If the director is terminated because of death and disability the option may be exercised for up to one year after such termination. If the director is terminated for cause, all unexercised options shall terminate immediately. The Director Plan authorizes the granting of options to purchase up to 100,000 shares of Common Stock. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following table sets forth the number of shares of Common Stock beneficially owned by: (i) each person or entity known by the Company to own 5% or more of the Company's Common Stock; (ii) each director of the Company (iii) named Executive Officer; and (iv) all executive officers and directors as a group. All persons named in the table have sole voting and investment power with respect to all shares of Common Stock owned unless otherwise noted. The number of shares listed is as of March 20, 1998.
NUMBER OF SHARES PERCENT OF OUTSTANDING NAME AND ADDRESS BENEFICIALLY OWNED SHARES - ---------------- ------------------ ------ Dakotah Incorporated Employee Profit Sharing Plan First American Trust, Trustee One North Park Lane Webster, South Dakota 57274 1,438,500 35.1% Heartland Advisors, Inc. 790 North Milwaukee Street Milwaukee, Wisconsin 53202 368,000 9.0% George C. Whyte(1,2) One North Park Lane Webster, South Dakota 57274 422,863 10.1% Troy Jones, Jr.(3) One North Park Lane Webster, South Dakota 57274 242,745 5.9% James D. Becker(1,4) One North Park Lane Webster, South Dakota 57274 11,466 .3% Dorothy A. Benson(1,5) One North Park Lane Webster, South Dakota 57274 15,622 .4% Gary L. Conradi(6) 205 East Sixth Sioux Falls, South Dakota 57102 10,000 .2% Michael G. Grosek(7) PO Box 543 Webster, South Dakota 57274 8,750 .2% Linda J. Laskowski(8) One North Park Lane Webster, South Dakota 57274 9,000 .2% Leo T. Reynolds(9) One North Park Lane Webster, South Dakota 57274 6,000 .1% Lee A. Schoenbeck(10) One North Park Lane Webster, South Dakota 57274 29,400 .7% William R. Retterath(12) One North Park Lane Webster, South Dakota 57274 45,000 1.2% Georgie Olson Harper(11) One North Park Lane Webster, South Dakota 57274 64,892 1.6% Michael G. Morton (13) One North Park Lane Webster, South Dakota 57274 20,000 .5% All executive officers and directors as a group (12 persons)(1,2,3,4,5,6,7,8,9,10,11,12,13) 885,738 21.63%
- ---------------------- (1) Includes shares allocated to the person's or group's account in the Employee Profit Sharing Plan. (2) Includes 229,300 shares issuable upon exercise of outstanding options, 58,998 shares allocated to Mr. Whyte in the Employee Profit Sharing Plan, 2,233 shares owned directly by Mr. Whyte's wife and 25,587 shares allocated to Mr. Whyte's wife in the Employee Profit Sharing Plan. (3) Includes 242,745 shares issuable upon exercise of an outstanding option. (4) Includes 6,500 shares issuable upon exercise of an outstanding option, and 4,889 shares allocated to Mr. Becker in the Employee Profit Sharing Plan. (5) Includes 6,500 shares issuable upon exercise of an outstanding option, and 7,969 shares allocated to Ms. Benson in the Employee Profit Sharing Plan. (6) Includes 8,000 shares issuable upon exercise of an outstanding option. (7) Includes 8,000 shares issuable upon exercise of an outstanding option. (8) Includes 7,000 shares issuable upon exercise of an outstanding option. (9) Includes 6,000 shares issuable upon exercise of an outstanding option. (10) Includes 12,000 shares issuable upon exercise of an outstanding option, 11,000 shares held in Mr. Schoenbeck's IRA and 600 shares held by Mr. Schoenbeck as custodian for his children. (11) Includes 20,999 shares issuable upon exercise of outstanding options, 39,103 shares allocated to Ms. Harper in the Employee Profit Sharing Plan and 1,000 shares owned directly by Ms. Harper's spouse. (12) Includes 40,000 shares issuable upon exercise of an outstanding option and 2,000 shares owned in Mr. Retterath's IRA. (13) Includes 20,000 shares issuable upon exercise of an outstanding option. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a) 1. FINANCIAL STATEMENTS: The following financial statements of the Company are included herein as part of this report at Item 8. Report of Independent Certified Public Accountants Balance Sheets at December 31, 1997 and 1996 Statements of Operations for years ended December 31, 1997, 1996 and 1995 Statements of Changes in Stockholders' Equity for years ended December 31, 1997, 1996 and 1995 Statements of Cash Flows for years ended December 31, 1997, 1996 and 1995 Notes to Financial Statements 2. FINANCIAL STATEMENTS SCHEDULES: The following financial statement schedule of the Company is included herein as part of this report at Item 8. Schedule II - Valuation and Qualifying Accounts for the years ended December 31, 1997, 1996 and 1995 3. LISTING OF EXHIBITS: EXHIBITS DESCRIPTION PAGE -------- ----------- ---- 3.1 Articles of Incorporation (Exhibit 3.1)(1) --- 3.2 Bylaws (Exhibit 3.2)(1) --- 4.2 Form of Representative's Warrant to Purchase Common Stock --- 10.1 Amended and Restated Credit and Security Agreement dated August 17, 1995 with Norwest Business Credit, Inc. (Exhibit 10.1)(5) --- 10.2 Promissory Note dated December 31, 1995 with the State of South Dakota Board of Economic Development (Exhibit 10.5)(5) --- 10.3 Promissory Note, Mortgage and Agreement Relating to Employment dated February 17, 1994, between the Company and South Dakota Board of Economic Development (Exhibit 10.13)(3) --- 10.4 Loan Agreement dated December 2, 1974, among the Small Business Administration, Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.13)(1) --- 10.5 Loan Agreement dated September 29, 1976, among the Small Business Administration, Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.14)(1) --- 10.6 Lease Purchase Agreement dated November 26, 1974, between Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.15)(1) --- 10.7 Lease Purchase Agreement dated September 29, 1976, between Webster Development Corporation and Tract Handcraft Industries Cooperative (predecessor of the Company) (Exhibit 10.16)(1) --- 10.8 Lease Purchase Agreement dated June 1, 1977, between Veblen Development Corporation and the Company (Exhibit 10.17)(1) --- 10.9 Amended and Restated Deferred Compensation Agreement (Phantom Stock) dated May 1, 1993, but effective as of January 1, 1990, between the Company and Terry G. Sampson (Exhibit 10.18)(1)(2) --- 10.10 Amended and Restated Deferred Compensation Agreement dated May 1, 1993, but effective as of January 1, 1990, between the Company and George C. Whyte, Jr. (Exhibit 10.19)(1)(2) --- 10.11 Form of Nonqualified Stock Option (Exhibit 10.20)(1) --- 10.12 Employment Agreement dated January 31, 1994, between the Company and George C. Whyte (Exhibit 10.23)(1)(2) --- 10.13 Employment Agreement dated January 31, 1994, between the Company and Terry G. Sampson (Exhibit 10.24)(1)(2) --- 10.14 Description of 1996 Incentive Compensation Plans(2) 52 10.15 Form of Nonstatutory Option Agreement for Directors (Exhibit 10.1)(4) --- 10.16 Nonstatutory Option Agreement with George C. Whyte dated effective May 25, 1995 (Exhibit 10.2)(2)(3)(4) --- 10.17 Nonstatutory Option Agreement with Orion Financial Corporation of South Dakota dated effective January 27, 1995 (Exhibit 10.3)(2)(4) --- 10.18 Nonstatutory Option Agreement with William Retterath dated effective April 8, 1997 53 10.19 Form of Officer and Director Indemnification Agreement (Exhibit 10.26)(1)(2) --- 10.20 Dakotah, Incorporated Employee Profit Sharing Plan, as amended through March 1995 (Exhibit 10.22)(2)(5) --- 10.21 Dakotah, Incorporated 1995 Stock Option Plan (Exhibit 10.1)(2)(6) --- 10.22 Dakotah, Incorporated 1996 Stock Option Plan for Directors (Exhibit 10.2)(2)(6) --- 10.23 Dakotah, Incorporated Nonstatutory Option Agreement Under the 1995 Stock Option Plan Between the Company and Orion Financial Corp. dated effective January 1, 1996 (Exhibit 10.3)(2)(6) --- 10.24 Employment Agreement dated January 1, 1997, between the Company and George C. Whyte(2)(9) --- 10.25 Credit and Security Agreement dated June 30, 1997 with Diversified Business Credit, Inc.(8) --- 10.26 First Amendment dated July 7, 1997 to Credit and Security Agreement with Diversified Business Credit, Inc.(8) --- 10.27 Second Amendment dated March 25, 1998 to Credit and Security Agreement with Diversified Business Credit, Inc. 57 23.1 Consent of Grant Thornton LLP 60 24.1 Powers of Attorney (included in Signature Page) --- 27.1 Financial Data Schedule 61 27.2 Restated Financial Data Schedule 62 (1) Incorporated herein by reference to the specified exhibit to the Registration Statement on Form SB-2, Reg. No. 33-74766-D. (2) Indicates management contracts, compensation plans or arrangements required to be filed as exhibits. (3) Incorporated herein by reference to the specified exhibit to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. (4) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-QSB for the quarter ended September 30, 1995. (5) Incorporated herein by reference to the specified exhibit to the Annual Report on Form 10-KSB for the fiscal year ended December 31, 1995. (6) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-QSB for the quarter ended March 31, 1996. (7) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-Q for the quarter ended March 31, 1997. (8) Incorporated herein by reference to the specified exhibit in the Quarterly Report on Form 10-Q for the quarter ended June 30, 1997. (9) Incorporated herein by reference to the specified exhibit in the Annual Report on Form 10-K for the fiscal year ended December 31, 1997. (b) Registrant was not required to file a report on Form 8-K during the fourth quarter ended December 31, 1997. SIGNATURES In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. DAKOTAH, INCORPORATED Date: March 27, 1998 /s/ William R. Retterath --------------------------------------------- William R. Retterath, Chief Financial Officer KNOWN TO ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints William R. Retterath, George C. Whyte and Lee A. Schoenbeck, and each of them, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any amendments to this Form 10-K, and to file the same, with exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorney-in-fact or his substitute or substitutes, may do or cause to be done by virtue hereof. In accordance with the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/ George C. Whyte President Chief Executive Officer March 27, 1998 - -------------------------------- and Chairman of the Board of Directors George C. Whyte /s/ William R. Retterath Chief Operating Officer and Chief Financial March 27, 1998 - -------------------------------- Officer William R. Retterath /s/ Troy Jones, Jr. Director March 27, 1998 - -------------------------------- Troy Jones, Jr. /s/ Leo T. Reynolds Director March 27, 1998 - -------------------------------- Leo T. Reynolds /s/ James D. Becker Director March 27, 1998 - -------------------------------- James D. Becker /s/ Dorothy A. Benson Director March 27, 1998 - -------------------------------- Dorothy A. Benson /s/ Gary L. Conradi Vice Chairman of Board of Directors, March 27, 1998 - -------------------------------- Director Gary L. Conradi /s/ Michael G. Grosek Director March 27, 1998 - -------------------------------- Michael G. Grosek /s/ Linda J. Laskowski Director March 27, 1998 - -------------------------------- Linda J. Laskowski /s/ Lee A. Schoenbeck Secretary, Director March 27, 1998 - -------------------------------- Lee A. Schoenbeck
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors and Stockholders Dakotah, Incorporated We have audited the accompanying balance sheets of Dakotah, Incorporated as of December 31, 1997 and 1996, and the related statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Dakotah, Incorporated as of December 31, 1997 and 1996, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. We have also audited Schedule II for each of the three years in the period ended December 31, 1997. In our opinion, this schedule presents fairly, in all material respects, the information required to be set forth therein. Minneapolis, Minnesota February 27, 1998 (except for note E, as to which the date is March 25, 1998) DAKOTAH, INCORPORATED BALANCE SHEETS
December 31, -------------------------- ASSETS 1997 1996 ----------- ----------- CURRENT ASSETS Cash and cash equivalents $ 45,084 $ 2,690 Accounts receivable, less allowance for doubtful accounts of $326,000 and $382,000 in 1997 and 1996 4,491,697 7,538,724 Inventories 15,423,002 9,555,897 Income taxes receivable 963,000 -- Prepaid expenses and other 449,323 735,929 Deferred income taxes 568,800 496,000 ----------- ----------- Total current assets 21,940,906 18,329,240 PROPERTY, PLANT AND EQUIPMENT - NET 5,339,357 4,406,520 OTHER ASSETS Deferred income taxes 179,000 185,000 Other 9,200 9,200 ----------- ----------- $27,468,463 $22,929,960 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term debt $12,797,736 $ 6,743,083 Current maturities of long-term obligations 80,549 46,383 Current maturities of capital lease obligations including $27,117 and $29,541 to related parties in 1997 and 1996 197,942 104,313 Current maturities of note payable to officers 263,800 332,139 Outstanding checks in excess of bank balances 452,784 379,917 Accounts payable 1,781,996 2,134,845 Accrued liabilities Compensation and related benefits 566,165 925,739 Other 758,343 716,217 Income taxes payable -- 187,079 ----------- ----------- Total current liabilities 16,899,315 11,569,715 LONG-TERM OBLIGATIONS Long-term maturities of long-term obligations 1,211,895 438,140 Long-term maturities of capital lease obligations including $57,069 and $82,563 to related parties in 1997 and 1996 601,311 345,283 Long-term maturities of note payable to officers -- 129,162 COMMITMENTS -- -- STOCKHOLDERS' EQUITY Common stock, par value $.01, 10,000,000 shares authorized; 3,499,755 shares issued and outstanding 34,998 34,998 Additional contributed capital 7,180,855 6,904,156 Retained earnings 1,540,089 3,508,506 ----------- ----------- 8,755,942 10,447,660 ----------- ----------- $27,468,463 $22,929,960 =========== ===========
The accompanying notes are an integral part of these statements DAKOTAH, INCORPORATED STATEMENTS OF OPERATIONS
Years ended December 31, ---------------------------------------------- 1997 1996 1995 ------------ ------------ ------------ Net sales $ 38,711,484 $ 41,559,597 $ 30,884,081 Costs of goods sold 30,168,977 30,599,183 22,485,346 ------------ ------------ ------------ Gross profit 8,542,507 10,960,414 8,398,735 Operating expenses Selling 5,101,705 5,501,681 4,347,309 General and administrative 5,163,937 3,727,231 3,194,235 ------------ ------------ ------------ 10,265,642 9,228,912 7,541,544 ------------ ------------ ------------ Operating profit (loss) (1,723,135) 1,731,502 857,191 Other income (expense) Interest (1,200,540) (612,717) (241,285) Gain (loss) on sale of equipment (8,554) 109,700 56,210 Other 14,813 3,120 43,923 ------------ ------------ ------------ (1,194,281) (499,897) (141,152) ------------ ------------ ------------ Earnings (loss) before income taxes and cumulative effect of a change in accounting principle (2,917,416) 1,231,605 716,039 Income tax expense (benefit) (1,030,400) 404,000 256,000 ------------ ------------ ------------ Earnings (loss) before cumulative effect of a change in accounting principle (1,887,016) 827,605 460,039 Cumulative effect of a change in accounting principle, net of taxes of $43,446 (81,401) -- -- ------------ ------------ ------------ Net earnings (loss) $ (1,968,417) $ 827,605 $ 460,039 ============ ============ ============ Earnings (loss) per share before cumulative effect of a change in accounting principle Basic $ (.54) $ .24 $ .13 ============ ============ ============ Dilutive $ (.54) $ .23 $ .13 ============ ============ ============ Cumulative effect of a change in accounting principle - basic and dilutive $ (.02) $ -- $ -- ============ ============ ============ Net earnings (loss) per share Basic $ (.56) $ .24 $ .13 ============ ============ ============ Dilutive $ (.56) $ .23 $ .13 ============ ============ ============ Weighted average common and common equivalent shares outstanding Basic 3,499,755 3,499,755 3,499,755 ============ ============ ============ Dilutive 3,499,755 3,550,128 3,508,561 ============ ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
Common stock Additional Total ---------------------------- contributed Retained stockholders' Shares Amount capital earnings equity ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1994 3,499,755 $ 34,998 $ 6,804,156 $ 2,220,862 $ 9,060,016 Net earnings -- -- -- 460,039 460,039 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1995 3,499,755 34,998 6,804,156 2,680,901 9,520,055 Compensation to outside consultant -- -- 100,000 -- 100,000 Net earnings -- -- -- 827,605 827,605 ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1996 3,499,755 34,998 6,904,156 3,508,506 10,447,660 Compensation to outside consultant -- -- 276,699 -- 276,699 Net loss -- -- -- (1,968,417) (1,968,417) ------------ ------------ ------------ ------------ ------------ Balance at December 31, 1997 3,499,755 $ 34,998 $ 7,180,855 $ 1,540,089 $ 8,755,942 ============ ============ ============ ============ ============
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED STATEMENTS OF CASH FLOWS
Years ended December 31, ------------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net earnings (loss) $(1,968,417) $ 827,605 $ 460,039 Adjustments to reconcile net earnings (loss) to net cash used in operating activities Depreciation and amortization 807,990 683,166 445,951 (Gain) loss on sale of equipment 8,554 (109,700) (56,210) Loss on asset write-off and change in accounting principle 269,187 -- -- Deferred income taxes (66,800) 135,000 156,000 Compensation to outside consultant 276,699 100,000 -- Changes in assets and liabilities: Accounts receivable 3,047,027 (1,173,118) (1,546,601) Inventories (5,867,105) (2,191,862) (1,494,989) Prepaid expenses and other 286,606 (258,422) (225,254) Accounts payable (352,849) (118,436) 535,993 Accrued liabilities (317,448) 574,895 304,341 Income taxes (1,150,079) 187,079 (290,847) ----------- ----------- ----------- Net cash used in operating activities (5,026,635) (1,343,793) (1,711,577) Cash flows from investing activities: Capital expenditures (1,515,861) (2,380,711) (1,060,640) Proceeds from sale of equipment -- 109,700 56,210 Other -- (82,821) (59,746) ----------- ----------- ----------- Net cash used in investing activities (1,515,861) (2,353,832) (1,064,176) Cash flows from financing activities: Outstanding checks in excess of bank balance 72,867 379,917 -- Net borrowings under short-term debt agreements 6,054,653 3,076,287 3,019,448 Proceeds from issuance of long-term obligations 880,000 377,539 -- Proceeds from borrowing from officers 25,000 -- -- Principal payments on long-term obligations (72,079) (51,289) (342,049) Principal payments on capital lease obligations (153,050) (98,169) -- Principal payments on note payable to officers (222,501) (461,300) -- ----------- ----------- ----------- Net cash provided by financing activities 6,584,890 3,222,985 2,677,399 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents 42,394 (474,640) (98,354) Cash and cash equivalents at beginning of year 2,690 477,330 575,684 ----------- ----------- ----------- Cash and cash equivalents at end of year $ 45,084 $ 2,690 $ 477,330 =========== =========== =========== Supplemental disclosure of noncash investing/financing activity: Acquisition of computer hardware and software through capital lease arrangements $ 502,707 $ -- $ 376,838 Supplemental disclosure of cash flow information: Cash paid during the period for: Interest $ 1,054,473 $ 627,039 $ 215,146 Income taxes $ 141,210 $ 152,148 $ 333,260
The accompanying notes are an integral part of these statements. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE A - NATURE OF BUSINESS Dakotah, Incorporated (the "Company") designs, manufactures and markets textile home fashion furnishings which are both functional and decorative. The Company's principal products are decorative pillows, throws (polyester fleece and cotton), bedding ensembles, and other home accessory products such as footstools, chairpads, and table linens which are manufactured through its manufacturing facilities principally located in South Dakota. The Company sells its products domestically and internationally to a broad range of major retailers, including department stores, specialty retailers, mass merchandisers and mail order houses primarily in the United States. Showrooms for the Company's products which support sales are located across the United States in New York, Atlanta, Denver, Seattle and Chicago. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES A summary of significant accounting policies consistently applied in the preparation of the financial statements follows: Cash and Cash Equivalents The Company considers all highly liquid temporary investments purchased with an original maturity of three months or less to be cash equivalents. Accounts Receivable The Company grants credit to customers in the normal course of business, but generally does not require collateral or any other security to support amounts due. Management performs on-going credit evaluations of customers. The Company maintains allowances for potential credit losses which, when they occur, have approximated the estimates of management. Inventories Inventories are stated at the lower of cost or market with cost determined using the first-in, first-out method. During 1997, 1996, and 1995, the Company recorded charges of $1,482,000, $821,000 and $390,000 to cost of goods sold to reduce the value of inventory to market. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued At December 31, 1997, a portion of the Company's inventory exceeded its current needs. Management has introduced a plan under which it expects to reduce this inventory. During the fourth quarter of 1997, the Company recorded a charge of $420,000 to cost of goods sold as its estimate of the loss to be incurred in reducing this inventory. Although management believes this estimate is sufficient, it is reasonably possible that in the near term losses could be significantly different than estimated. Depreciation and Amortization Depreciation and amortization are provided in amounts sufficient to relate the cost of assets to operations over their estimated useful lives, using straight-line and accelerated methods for financial reporting and income tax purposes. Estimated useful lives range from 3 to 39 years for buildings and improvements and leasehold improvements and 4 to 7 years for machinery and equipment and office equipment, furniture and fixtures and other. Employee Benefits The Company acts as a self-insurer for employee medical and short-term disability income plans. Aggregate and specific stop loss coverages are provided to control overall costs and individual catastrophic claims. Losses and claims are recorded as incurred, based upon actual and estimated losses and claims outstanding. Advertising The Company expenses advertising costs as incurred. Advertising expense was approximately $379,000, $589,000 and $461,000 during 1997, 1996 and 1995. Stock Based Compensation The Company's employee stock option plans are accounted for under the intrinsic value method. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued Earnings (Loss) Per Share On December 31, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per Share." As required, all net earnings (loss) per share data in the financial statements have been restated to conform to the provisions of SFAS 128. The Company's basic net earnings (loss) per share amounts have been computed by dividing net earnings (loss) by the weighted average outstanding common shares. The Company's diluted net earnings (loss) per share have been computed by dividing net earnings (loss) by the weighted average outstanding common shares and common share equivalents relating to stock options and warrants, when dilutive. Options to purchase 926,212, 284,300 and 184,300 shares of common stock with a weighted average exercise price of $3.99, $4.99 and $5.13 were outstanding at December 31, 1997, 1996 and 1995, but were not included in the computation of diluted net earnings per share because to do so would have been anti-dilutive. Revenue Recognition The Company records revenue at the time its products are shipped. Change in Accounting Principle The Company changed its method of accounting for costs of a planned software system conversion in the fourth quarter of 1997, pursuant to Emerging Issues Task Force (EITF) Issue No. 97-13. Previously, substantially all direct costs relating to the project were capitalized, including the portion related to business process reengineering. Under EITF 97-13, all costs for business reengineering must be expensed as incurred. As a result of this change, the Company wrote off $124,847 ($81,401, net of income tax benefit) of previously capitalized reengineering costs as a cumulative effect of a change in accounting principle in the fourth quarter of 1997. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING PLOICIES - Continued Recent Accounting Pronouncements SFAS 130 "Reporting Comprehensive Income" requires companies to display an amount representing total comprehensive income, as defined by the statement, as part of a company's basic financial statements. Additionally SFAS 131 "Disclosures about Segments of an Enterprise and Related Information" requires a company to disclose financial and other information about its business segments, their products and services, geographic areas, major customers, revenues, profits, assets and other information. These statements are effective for financial statements for periods beginning after December 15, 1997. The adoption of these two statements is not expected to have a material effect on the financial statements of the Company. Accounting Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. NOTE C - INVENTORIES The principal classifications of inventory and their corresponding values are summarized as follows at December 31: 1997 1996 ----------- ---------- Finished goods $ 6,858,092 $2,165,930 Work in process 957,972 1,667,023 Raw materials 7,606,938 5,722,944 ----------- ---------- $15,423,002 $9,555,897 =========== ========== DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE D - PROPERTY, PLANT AND EQUIPMENT The principal classifications of property, plant and equipment and their corresponding values are summarized below at cost as of December 31:
1997 1996 ---------- ---------- Buildings and improvements $2,418,374 $2,334,516 Leasehold improvements 130,046 123,731 Machinery and equipment 3,278,933 3,009,792 Office equipment, furniture and fixtures and other 2,858,139 1,478,163 ---------- ---------- 8,685,492 6,946,202 Less accumulated depreciation and amortization 3,382,135 2,575,682 ---------- ---------- 5,303,357 4,370,520 Land 36,000 36,000 ---------- ---------- $5,339,357 $4,406,520 ========== ==========
Impairment Loss During the fourth quarter of 1997, the Company recorded within general and administrative expenses a loss of $144,340 for the write-down of capitalized costs associated with computer software development and system conversion. The Company considers excessive costs over that expected to be incurred to be its primary indicator of the impairment. As such, the carrying value of this asset was written down to its estimated fair value at December 31, 1997. The fair value of this asset was determined based upon certain management estimates and assumptions including, but not limited to, actual capitalized costs incurred compared with the total estimated cost of the software conversion process. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE E - NOTES PAYABLE Short-Term Debt The Company has a credit facility with a financial institution consisting of a revolving note and a term note which terminate in June 1999. The total amount available under the revolving note, which is due on demand, is the lesser of $15,000,000 or a defined borrowing base of eligible receivables and inventory balances, plus outstanding amounts under the term note. Advances under the revolving note, based on eligible receivables and inventory balances, provide for monthly interest payments at 1% and 3% above the financial institution's prime rate (effective rates of 9.5% and 11.5% at December 31, 1997). Advances under the term note, which is due on demand, requires monthly principal payments of $33,333. Monthly interest payments are computed based on 1% above the financial institution's prime rate (effective rate of 9.5% at December 31, 1997). The outstanding balances on the revolving note and term note, which approximated their fair values, were $10,997,734 and $1,800,002 at December 31, 1997. The outstanding balances of $6,034,750 and $708,333 at December 31, 1996 related to notes payable with a bank that were refinanced in 1997. In March, 1998, the Company renegotiated certain terms and covenants of its credit facility. As part of that process, the Company obtained an additional $1,000,000 of availability, above the amount of its borrowing base, under the revolving note at the financial institution's prime rate plus 4%. This additional funding is available to the Company through July 31, 1998. The total amount provided for all of the notes, cannot exceed $15,000,000. The current credit facility contains affirmative and negative covenants including, among other things, provisions for minimum net earnings, minimum tangible and book net worth requirements, and limitations on capital expenditures. Additionally, the Company may not incur additional borrowings, sell certain assets, acquire other businesses or pay cash dividends without prior written consent. The Company was in compliance with or obtained waivers for all covenants at December 31, 1997. The Company expects to be able to renew or replace all lines of credit with agreements under similar terms as they become due. Note Payable to Officer The Company has a note payable to an officer of the Company with outstanding balances of $263,800 and $461,301 at December 31, 1997 and 1996. The note bears an interest rate of 6% and is due on demand. The Company recorded interest of approximately $22,000, $27,000 and $42,000 for the years ended December 31, 1997, 1996 and 1995. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE E - NOTES PAYABLE - Continued Long-Term Obligations Long-term notes payable consist of the following at December 31:
1997 1996 ------ ----- Note payable to State of South Dakota - due February 2001, payable in monthly installments of $2,897, including interest at 3% with a balloon payment of $161,215 in February 2001, collateralized by certain equipment $ 243,179 $ 269,260 Note payable to State of South Dakota - due February 1999, payable in monthly installments of $555, including interest at 3% with a balloon payment of $80,309 in February 1999, collateralized by a building 85,171 89,767 Note payable to State of South Dakota - due February 2002, payable in monthly installments of $4,049, including interest at 3% with a balloon payment of $590,373 in February 2002, collateralized by equipment 707,508 - Note payable to Northeast South Dakota Conservation Corporation - due February 2002, payable in monthly installments of $1,053, including interest at 5.75%, collateralized by a second mortgage on a building 146,583 - Notes payable to a bank - due January 2003, payable in monthly installments of $1,455, including interest at 0.5% over prime, (effective rate of 9.0% at December 31, 1997 and 1996), collateralized by certain property 70,190 80,808 Other 39,813 44,688 ---------- --------- 1,292,444 484,523 Less current maturities 80,549 46,383 ---------- --------- $1,211,895 $ 438,140 ========== =========
DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE E - NOTES PAYABLE - Continued Scheduled principal repayments on the long-term notes payable above are as follows for the years ending December 31: 1998 $ 80,549 1999 160,460 2000 82,642 2001 213,622 2002 & thereafter 755,171 ---------- $1,292,444 ========== Based upon the borrowing rates currently available to the Company for loans with similar terms and average maturities, the carrying amount of notes payable approximates their fair value. NOTE F - LEASES The Company leases certain manufacturing facilities, sales offices and showrooms, as well as communications, computer and office equipment under both capital lease and operating lease arrangements. The facility and showroom leases generally require a base rental fee plus charges for utilities and other costs. Capital lease obligations consist of the following at December 31:
1997 1996 -------- -------- Capital lease obligation to a finance company for lease of equipment, due in November 2000 with monthly payments of $7,814, including imputed interest rate of 8.9% $253,980 $337,492 Capital lease obligations to related parties for lease/purchase agreements for land and buildings, due in varying monthly payments, including imputed interest ranging from 7.2% to 9.5% 84,186 112,104
DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE F - LEASES - Continued
1997 1996 -------- -------- Capital lease obligations to a finance company for two lease agreements of equipment, due in June 2002 with monthly payments of $7,516 and $2,713, including imputed interest rates of 7.3% and 10.5% $461,087 $ - -------- -------- 799,253 449,596 Less current maturities 197,942 104,313 -------- -------- $601,311 $345,283 ======== ========
Property, plant and equipment includes the following amounts under capital lease:
December 31, ------------------------- 1997 1996 --------- -------- Building and improvements $ 386,000 $506,500 Office equipment, furniture, fixtures and other 879,545 376,838 --------- -------- 1,265,545 883,338 Less accumulated depreciation 438,687 470,017 --------- -------- Net $ 826,858 $413,321 ========= ========
Future minimum lease payments under the above capital and operating lease obligations are as follows for the years ending December 31:
Operating Capital --------- ------- 1998 $ 500,686 $257,227 1999 411,995 251,552 2000 346,169 230,163 2001 282,690 135,706 2002 187,728 61,374 Thereafter 16,432 - ---------- -------- Total minimum payments $1,745,700 936,022 ========== Imputed interest 136,769 -------- Present value of minimum payments $799,253 ========
The Company recorded interest for related party capital lease obligations of approximately $6,000, $11,000 and $14,000 during the years ended December 31, 1997, 1996 and 1995. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE F - LEASES - Continued Total rent expense for all operating leases was approximately $657,000, $555,000 and $438,000 for the years ended December 31, 1997, 1996 and 1995. NOTE G - COMMITMENTS The Company has entered into various licensing arrangements which require royalty payments ranging from 2% to 12% of net sales of each product. Certain license agreements also require guaranteed minimum royalties, which can be reduced through royalty payments on net sales. At December 31, 1997, guaranteed future minimum royalty payments totaled approximately $125,000. Royalty expense was approximately $225,000, $364,000 and $245,000 in 1997, 1996 and 1995. NOTE H - EMPLOYEE PROFIT SHARING PLAN The Company maintains a profit sharing plan ("Plan") for the benefit of essentially all employees who are not covered by a collective bargaining agreement and who have completed one year of service as defined in the Plan. Contributions to the Plan are determined by the Company's Board of Directors at its discretion, but are limited to maximum permissible amounts as defined in the Plan. Contributions to the Plan may be made in the form of shares of the Company's common stock or cash. The Company administers the Plan. Plan participants who retire, die, or become disabled have the option either to receive their account balance in the year following such termination or to leave their account balance in the Plan until a later date, but no later than age 70-1/2. Plan participants who have terminated employment for any other reason have these same options except that they may defer distribution no later than normal retirement age. At December 31, 1997 and 1996, the Plan held 1,514,284 and 1,669,969 shares of the Company's common stock. There were no Company contributions in 1997. Company contributions to the Plan were $59,000 and $50,000 for 1996 and 1995. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE I - STOCKHOLDERS' EQUITY Stock Options and Warrants The Company has stock option plans for the benefit of selected officers, employees, directors and outside consultants of the Company. A total of 900,000 shares of common stock are reserved for issuance under the plans and an additional 367,300 shares were reserved for issuance of options granted prior to the adoption of the plans. Options under the Company's plans are generally granted at fair market value and expire between five and seven years from the grant date. A summary of all of the Company's stock option transactions for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 -------------------- --------------------- --------------------- Weighted Weighted Weighted average average average exercise exercise exercise Shares price Shares price Shares price ------ -------- ------ -------- ------ -------- Outstanding at beginning of year 758,045 $4.27 367,300 $4.41 306,450 $4.97 Granted 169,167 2.78 390,745 4.15 163,000 3.69 Forfeited (1,000) 2.88 - - (102,150) 4.97 ------- ------- -------- Outstanding at end of year 926,212 $3.99 758,045 $4.27 367,300 $4.41 ======= ======= ======== Options exercisable at end of year 512,880 $4.25 354,300 $4.49 317,300 $4.54 ======= ======= ======== Weighted average fair value of options granted to employees and directors during the year $1.63 $2.07 $1.34 Weighted average exercise price of options granted to employees and directors during the year $2.78 $4.59 $3.61
DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE I - STOCKHOLDERS' EQUITY - Continued The following information applies to all stock options that are outstanding at December 31, 1997:
Options outstanding Options exercisable ----------------------------- ------------------------ Weighted Weighted Weighted average average average Range of Number remaining exercise Number exercise exercise prices outstanding contractual life price exercisable price --------------- ----------- ---------------- ----- ----------- ----- $2.56 - $3.75 351,167 4 years $3.21 195,665 $3.47 $3.88 - $5.13 575,045 3 years $4.46 317,215 $4.70 ------- ------- 926,212 512,880 ======= =======
In prior years, the Company issued a warrant to purchase 100,000 shares of common stock which is exercisable until March 1999 at $7.17 per share. In January 1996, the Company granted options to purchase 242,745 shares of common stock at $3.875 per share to a consultant. The market value was $4.25 per share when the options were approved. The options vest over three years and have a term of five years; 80,915 of the options were exercisable at December 31, 1997. In December 1997, the consultant's services were terminated. Compensation expense of $276,699 and $100,000 was recorded in 1997 and 1996, respectively. The fair value of each option grant to employees and directors was estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in the years ended December 31: 1997 1996 1995 ---- ---- ---- Dividend yield zero zero zero Expected volatility 48% 30% 30% Risk free interest rate 6.80% 6.40% 5.98% Expected lives; in years 6.50 6.62 5.00 DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE I - STOCKHOLDERS' EQUITY - Continued The Company's pro forma net earnings (loss) and net earnings (loss) per share for 1997, 1996 and 1995, had the fair value method been used for options granted to employees and directors, are set forth below. These effects may not be representative of the future effects of applying this method.
1997 1996 1995 ---------------------------- ------------------------ ---------------------- As Pro As Pro As Pro reported forma reported forma reported forma ------------ ------------ -------- -------- -------- -------- Net earnings (loss) $(1,968,417) $(2,060,909) $827,605 $777,605 $460,039 $424,039 Net earnings (loss) per share Basic $(.56) $(.59) $.24 $.22 $.13 $.12 Dilutive $(.56) $(.59) $.23 $.22 $.13 $.12
NOTE J - INCOME TAXES Income tax expense (benefit) consists of the following for the years ended December 31: 1997 1996 1995 ----------- -------- -------- Current $ (963,600) $269,000 $100,000 Deferred (66,800) 135,000 156,000 ----------- -------- -------- $(1,030,400) $404,000 $256,000 =========== ======== ======== Deferred income tax expense (benefit) results from temporary differences in the recognition of income and expense items for tax and financial statement reporting purposes. Significant components of the Company's deferred tax assets as of December 31 are as follows: 1997 1996 -------- -------- Current Accounts receivable allowance $115,000 $135,000 Inventory write-down 235,800 104,000 Accrued compensation and related accruals 105,000 94,000 Accrued expenses 15,000 117,000 Charitable contributions carryforward 66,000 46,000 Other 32,000 - -------- -------- $568,800 $496,000 ======== ======== DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE J - INCOME TAXES - Continued 1997 1996 -------- -------- Long-term Notes payable $ 93,000 $163,000 Other 86,000 22,000 -------- -------- $179,000 $185,000 ======== ======== The Company has recorded deferred tax assets of $747,800 at December 31, 1997, reflecting the benefit of future tax deductions. Realization of these assets is dependent upon the Company generating sufficient future taxable income. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The amount of the deferred tax assets considered realizable, however, could be reduced if estimates of future taxable income are reduced. The following is a reconciliation of the Federal statutory income tax rate to the effective tax rate for the years ended December 31: 1997 1996 1995 ---- ---- ---- Statutory income tax rate (34.0)% 34.0% 34.0% State taxes (1.3) 1.4 1.3 Charitable contribution of inventory (0.2) (2.6) - Targeted jobs program tax credits (0.1) (0.2) (0.9) Other 0.3 0.2 1.4 ----- ---- ---- (35.3)% 32.8% 35.8% ===== ==== ==== NOTE K - CONCENTRATIONS The Company had sales to two customers representing 18% and 11% of net sales for the year ended December 31, 1997. The Company had sales to a different customer representing 15% of net sales for the year ended December 31, 1996. DAKOTAH, INCORPORATED NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1997, 1996 AND 1995 NOTE K - CONCENTRATIONS - Continued The Company licenses certain trademarks and tradenames and purchases a significant portion of its raw material requirements for its fleece products from a major supplier. Fleece product sales accounted for approximately 42% and 47% of the Company's net sales for 1997 and 1996. Substantially all fleece raw material used to manufacture fleece products is required to be purchased from this supplier. If the supply from the major supplier was interrupted, the Company believes there are alternative sources that could supply fleece raw material. The use of a substitute fleece would require the use of a trademark other than trademarks from the major supplier. NOTE L - FOURTH QUARTER ADJUSTMENTS During the fourth quarter of 1997, the Company recorded a charge of $420,000 to cost of goods sold to reduce the value of inventory to market (see note B). The Company also recorded $483,000 of additional operating expenses during the fourth quarter that included $144,000 for the write-down of computer software costs (see note D), $138,000 to record the remainder of compensation expense in connection with a former consultant's stock options (see note I) and various other expenses totaling $201,000. The Company recorded an income tax benefit of $316,000 related to all of these amounts. The Company recorded a charge of $81,401, net of an income tax benefit of $43,446, during the fourth quarter of 1997, in connection with the cumulative effect of a change in accounting principle (see note B). The net effect of these fourth quarter adjustments was a $668,000 increase to the net loss for the year ended December 31, 1997. DAKOTAH, INCORPORATED SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS THREE YEARS ENDED DECEMBER 31, 1997
Column A Column B Column C Column D Column E -------- -------- -------- -------- -------- Balance at Charged to Charged to Balance beginning of costs and other at end Description period expenses accounts Deductions of period ----------- ------ -------- -------- ---------- --------- Allowance for doubtful accounts: Year ended December 31, 1995 $110,000 $230,000 $ - $16,000 (a) $324,000 Year ended December 31, 1996 324,000 85,000 - 27,000 (a) 382,000 Year ended December 31, 1997 382,000 115,000 - 171,000 (a) 326,000
(a) Write-offs, less recoveries. EX-10.14 2 DESCRIPTION OF 1997 INCENTIVE COMPENSATION PLANS EXHIBIT 10.14 DESCRIPTION OF 1997 INCENTIVE COMPENSATION PLANS Dakotah, Incorporated (the "Company") has approved an individual incentive compensation plan (the "Bonus Plan") for George C. Whyte, President. Under the Bonus Plan, the named associate is eligible to receive a bonus of a specified percentage of his salary if certain individualized sales, profitability and expense limitation goals are met in 1997. In addition to the individualized goals, the Bonus Plan is subject to the following terms and conditions. 1. Named associate must be employed by the Company on December 31, 1997; 2. Any bonus paid is to be included as an expense before determining whether profit goals have been achieved; and 3. Any bonus will be paid after results for fiscal year 1997 are determined. EX-10.18 3 NONSTATUTORY OPTION AGREEMENT EXHIBIT 10.18 DAKOTAH, INCORPORATED NONSTATUTORY OPTION AGREEMENT UNDER THE 1995 STOCK OPTION PLAN Between: DAKOTAH, INCORPORATED (the "Company") and WILLIAM RETTERATH (the "Optionee"), dated April 8, 1997. The Company hereby grants to the Optionee an option (the "Option") under the Dakotah, Incorporated 1995 Stock Option Plan (the "Plan") to purchase One Hundred Thousand (100,000) Shares (the "Shares") of the Company's common stock under the terms and conditions set forth below. The terms and conditions applicable to the Option are as follows: 1. Nonstatutory Option. The Option shall be a nonstatutory Option and is not intended to qualify as an incentive stock option within the meaning of Section 422 of the Code. 2. Purchase Price - The purchase price of the stock shall be $2.6875 per share ("Option Price") which is the Fair Market Value of the Stock on the date of this Agreement. 3. Period of Exercise - The Option shall expire on the seventh anniversary date of its grant (the "Expiration Date") unless otherwise terminated as provided herein. Except as otherwise provided herein, the Option will vest as follows: (a) On and after the effective date of this Agreement, the Option may be exercised for not in excess of twenty percent (20%) of the shares originally subject to the Option; (b) On or after January 1, 1998, the Option may be exercised for not in excess of forty percent (40%) of the shares originally subject to the Option; (c) On or after January 1, 1999, the Option may be exercised for not in excess of sixty percent (60%) of the shares originally subject to the Option; (d) On or after January 1, 2000, the Option may be exercised for not in excess of eighty percent (80%) of the shares originally subject to the Option; (e) On and after January 1, 2001, the Option may be exercised at any time and from time to time within its terms in whole or in part, but it shall not be exercisable after the seventh anniversary of the date hereof. Notwithstanding the foregoing, the Option may be exercised in whole or in part in the event that the Optionee is disabled or dies, or if the Optionee's employment is terminated by the Company for any reason other than cause (as that term is defined below). 4. Transferability - This Option is not transferable except by will or the laws of descent and distribution and may be exercised during the lifetime of the Optionee only by the Optionee. 5. Termination of Employment - Except as may be agreed between the Committee and the Optionee, in the event that Optionee's employment is terminated, the Option may be exercised within its terms in whole or in part by the Optionee within three months after the date of termination; except that: a. If the Optionee's employment is terminated because the Optionee is disabled within the meaning of Code ss.422, the Optionee has one year rather than three months to exercise the Option. b. If the Optionee dies, the Option may be exercised by his or her legal representative or by a person who acquired the right to exercise the Option by bequest or inheritance or by reason of the death of the Optionee, but the Option must be exercised within one year after the date of the Optionee's death. c. If the Optionee's employment is terminated for cause, the Option terminates immediately, and the Optionee has no right to exercise the Option. For purposes of this Agreement, the term "cause" means (i) criminal activity or dishonesty of Optionee which is proven or admitted, (ii) acts of disloyalty to the Company during Optionee's employment with the Company, including without limitation, repeated public or private disparagement of the Company, its products or condition, the disclosure of any of the Company's trade secrets to competitors, or the employment by Optionee by a business entity directly competitive with the Company, or (iii) the failure of Optionee to use his best efforts to perform the functions of his employment in a professional manner consistent with executives in other businesses performing similar functions; provided, however, that a bona fide disability shall not result in a failure to "use best efforts." d. Notwithstanding the foregoing, in no event (including disability or death of the Optionee) may the Option be exercised after the Expiration Date. 6. No Guarantee of Service - This Agreement shall in no way restrict the right of the Company or the Company's Board of Directors to terminate Optionee at any time. 7. Method of Exercise; Use of Company Stock - The Option may be exercised, subject to the terms and conditions of this Agreement, by written notice to the Company. The notice shall be in the form attached to this Agreement and will be accompanied by payment (in such form as the Company may specify) of the full purchase price of the shares to be issued. The Company will issue and deliver certificates representing the number of shares purchased under the Option, registered in the name of the Optionee as soon as practicable after receipt of the notice. When exercising this Option, Optionee may make payment either in money or by tendering shares of the Company Stock owned by the Optionee, or by a combination of the two; provided, however, that (a) shares of the Company Stock may be utilized only if, at the time of exercise, the Stock of the Company is publicly traded, either on a stock exchange or nationally or locally over the counter, and (b) the right to pay in the form of the Company Stock can be utilized only twice in any calendar year. Where shares of Stock of the Company are employed to pay all or part of the exercise price, the shares of said Stock shall be valued at their Fair Market Value at the time of payment. 8. Withholding; Taxable Income - In any case where withholding is required or advisable under federal, state or local law in connection with any exercise by an Optionee hereunder, the Company is authorized to withhold appropriate amounts from amounts payable to Optionee, or may require Optionee to remit to the Company an amount equal to such appropriate amounts. 9. Merger, Consolidation or Acceleration Event - The terms of this Agreement are subject to modification upon the occurrence of certain events as described in Article XIII of the Plan. 10. Incorporation of Plan - This Agreement is made pursuant to the provisions of the Plan, which Plan is incorporated by reference herein. Terms used herein shall have the meaning employed in the Plan, unless the context clearly requires otherwise. In the event of a conflict between the provisions of the Plan and the provisions of this Agreement, the provisions of the Plan shall govern. DAKOTAH, INCORPORATED By -------------------------------- Troy Jones, Jr. Chief Executive Officer DAKOTAH, INCORPORATED NOTICE OF EXERCISE OF STOCK OPTION ISSUED UNDER THE 1995 STOCK OPTION PLAN To: Stock Option Committee DAKOTAH, INCORPORATED I hereby exercise my Option dated to purchase shares of $.01 par value common stock of the Company at the Option exercise price of $2.6875 per share. Enclosed is a certified or cashier's check in the total amount of $ , or payment in such other form as the Company has specified. I request that my shares be issued to me as follows: (Print your name in the form in which you wish to have the shares registered) (Social Security Number) (Street and Number) (City) (State) (Zip Code) Dated: ________________, 19___. Signature: EX-10.27 4 SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT EXHIBIT 10.27 SECOND AMENDMENT TO CREDIT AND SECURITY AGREEMENT This Second Amendment to Credit and Security Agreement is made and entered into as of this 25th day of March, 1998, by and between DAKOTAH, INCORPORATED, a South Dakota corporation (herein called "Borrower"), and Diversified Business Credit, Inc., a Minnesota corporation (herein called "Lender"). RECITALS A. Borrower executed and delivered to Lender a Credit and Security Agreement on June 30, 1997 (the "Credit Agreement"). B. Borrower executed and delivered to Lender the First Amendment to the Credit and Security Agreement dated as of July 7, 1997 (the "First Amendment"). C. Borrower and Lender desire to alter, amend and modify the Credit Agreement as hereinafter set forth. NOW, THEREFORE, in consideration of the foregoing, and for good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereby agree as follows: 1. Paragraph 1(d) of the Credit Agreement, as amended, is hereby deleted therefrom in its entirety and the following is hereby inserted in lieu thereof as an amendment thereto: (d) Borrower will pay interest on all outstanding loans advanced against Borrower's eligible accounts receivable or eligible machinery and equipment as determined by Lender under this Agreement ("Accounts/Equipment Loans") at an annual rate (computed on the basis of actual days elapsed in a 360-day year) which shall at all times be equal to the greater of (i) seven and one-half percent (7.5%) per annum or (ii) one percent (1%) above the rate of interest publicly announced by National City Bank of Minneapolis from time to time as its base rate or any similar successor rate (the "Base Rate"). Borrower will pay interest on all outstanding loans advanced against Borrower's eligible inventory as determined by Lender under this Agreement ("Inventory Loans") at an annual rate (computed on the basis of actual days elapsed in a 360-day year) which shall at all times be equal to the greater of (i) eight and one half percent (8.5%) per annum, or (ii) three percent (3%) above the Base Rate. Borrower will pay interest on all outstanding loans under this Agreement other than Accounts/Equipment Loans or Inventory Loans at an annual rate (computed on the basis of actual days elapsed in a 360-day year) which shall at all times be equal to the greater of (i) nine and one-half percent (9.5%) per annum or (ii) four percent (4%) above the Base Rate. Each change in the interest rate to take effect simultaneously with the corresponding change in the designated bank's base rate or any similar successor rate. In no event shall the Borrower pay interest at a rate greater than the highest rate permitted by law. All interest shall accrue on the principal balance outstanding from time to time and shall be payable on the first day of the next month in which accrued and in any event on demand. Borrower agrees that Lender may at any time or from time to time, without further request by Borrower, make a loan to Borrower, or apply the proceeds of any loans, for the purpose of paying all such interest promptly when due. In the computation of interest, Lender may allow two (2) banking days for the collection of uncollected funds. 2. Paragraph 5(h) of the Credit Agreement, as amended, is hereby deleted therefrom in its entirety and the following is hereby inserted in lieu thereof as an amendment thereto: "Earn net income of not less than $100,000.00 for the third fiscal quarter of each fiscal year, and $100,000.00 for the fourth fiscal quarter of each fiscal year." 3. Paragraph 5(i) of the Credit Agreement, as amended, is hereby deleted therefrom in its entirety and the following is hereby inserted in lieu thereof as an amendment thereto: "From January 1, 1998 through March 31, 1998, maintain Borrower's book net worth at amounts in excess of $7,800,000.00 and maintain Borrower's tangible net worth (excluding all intangible assets designated by Lender) at amounts in excess of $5,300,000.00. Beginning April 1, 1998 through June 30, 1998, maintain Borrower's book net worth at amounts in excess of $7,000,000.00 and maintain Borrower's tangible net worth (excluding all intangible assets designated by Lender) at amounts in excess of $4,800,000.00. Beginning July 1, 1998 through September 30, 1998, maintain Borrower's book net worth at amounts in excess of $6,900,000.00 and maintain Borrower's tangible net worth (excluding all intangible assets designated by Lender) at amounts in excess of $4,900,000.00. Beginning October 1, 1998, and at all times thereafter, maintain Borrower's book net worth at amounts in excess of $7,300,000.00 and maintain Borrower's tangible net worth (excluding all intangible assets designated by Lender) at amounts in excess of $5,500,000.00. For the purposes of calculating book net worth and tangible net worth, debt which has been subordinated to Lender on terms acceptable to Lender shall be deemed to be equity." 4. Paragraph 6(c) of the Credit Agreement, as amended, is hereby deleted therefrom in its entirety and the following is hereby inserted in lieu thereof as an amendment thereto: "Expend or contract to expend in any one calendar year, more than $200,000.00 in the aggregate, or more than $100,000.00 in any one transaction, for the lease, purchase, or other acquisition of any capital asset, or for the lease of any other asset, whether payable currently or in the future." 5. Except as expressly amended hereby, the Credit Agreement and the Security Documents (as defined in the Credit Agreement) shall remain in full force and effect in accordance with their original terms and binding upon and enforceable against Borrower, and not subject to any defense, counterclaim or right of setoff. IN WITNESS WHEREOF, the parties have executed and delivered this Second Amendment to Credit and Security Agreement as of the day and year first above written. DAKOTAH, INCORPORATED By_____________________________________ Its Chief Financial Officer DIVERSIFIED BUSINESS CREDIT, INC. By_____________________________________ Its Vice President EX-23.1 5 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCTS EXHIBIT 23.1 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS We have issued our report dated February 27, 1998, accompanying the financial statements included in the Annual Report of Dakotah, Incorporated on Form 10-K for the year ended December 31, 1997. We hereby consent to the incorporation by reference of said report in the Registration Statements of Dakotah, Incorporated on Form S-8 (File No. 33-86868, effective November 24, 1994; File No. 33-334185, effective August 22, 1997; File No. 33-334186, effective August 22, 1997 and File No. 33-334187, effective August 22, 1997). GRANT THORNTON LLP Minneapolis, Minnesota February 27, 1998 EX-27.1 6 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1997 DEC-31-1997 45,084 0 4,817,697 326,000 15,423,002 21,940,906 8,721,492 3,382,135 27,468,463 16,899,315 1,813,206 0 0 34,998 8,720,944 27,468,463 38,711,484 38,711,484 30,168,977 30,168,977 0 115,000 1,200,540 (2,917,416) (1,030,400) (1,887,016) 0 0 (81,401) (1,968,417) (.56) (.56)
EX-27.2 7 FINANCIAL DATA SCHEDULE
5 12-MOS DEC-31-1996 DEC-31-1996 2,690 0 7,920,724 382,000 9,555,897 18,329,240 6,462,797 2,555,767 22,929,960 11,569,715 912,585 0 0 34,998 10,412,662 22,929,960 41,559,597 41,559,597 30,599,183 30,599,183 0 85,000 612,717 1,231,605 404,000 827,605 0 0 0 827,605 .24 .23
-----END PRIVACY-ENHANCED MESSAGE-----